Grand Committee
Arrangement of Business
The Deputy Chairman of Committees (Lord Duncan of Springbank) (Con)
My Lords, if there is a Division in the Chamber while we are sitting, I will let the Committee know and we will adjourn for 10 minutes. We are anticipating a Division at around 5 pm.
National Insurance Contributions (Employer Pensions Contributions) Bill
(1 day, 8 hours ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Baroness Neville-Rolfe
Member’s explanatory statement
This amendment would exempt basic rate taxpayers in England, Wales and Scotland from the £2,000 cap.
Baroness Neville-Rolfe (Con)
My Lords, I am delighted to open proceedings with my noble friend Lord Altrincham on our first day in Committee and to be joined in this group by my noble friend Lord Leigh and the noble Baroness, Lady Altmann.
This is not a Bill we welcome. Contributors to research done by HMRC published last year were critical of all the hypothetical scenarios put forward by the Government, including the £2,000 cap, which I believe was seen as the most complicated option presented. This proposal will add to administrative burdens on business, as will become clear when we debate later amendments, especially where people have multiple jobs, start or change employment or vary what they do seasonally.
We are also greatly concerned that it will limit incentives to save, punish normal working people for making prudent and sensible decisions, and reduce pension adequacy. Pensions adequacy is one of the central long-term economic challenges facing this country and, under this Government, it is only set to get far worse. Today we are looking at another small nail in the coffin of such adequacy. Of course, the proposal was not in the Labour manifesto, which I think promised not to raise taxes on working people.
The research by HMRC has shown that employers were seriously concerned that
“changing the pension system could inevitably cause confusion and risk people becoming more disengaged with pensions”.
Against this unsatisfactory background, Amendments 1 and 14 make a simple but very important clarification, which is to exempt basic rate taxpayers from the £2,000 cap. According to the Society of Pension Professionals, one-quarter of the people who enjoy salary sacrifice, and who will be hit by the changes that this Bill will bring in, are basic rate taxpayers. Around 850,000 basic rate taxpayers will be affected by the cap, with possibly greater numbers joining them, as the cap is not indexed. The Minister might dispute those specific numbers, but even he conceded at Second Reading that people earning under £30,000 would be affected by this change.
Not only does this contrast starkly with the Government’s stated ambition, as set out in the Explanatory Notes and by the Minister at Second Reading, to affect only higher earners; it also disproportionately affects lower-paid workers. Salary sacrifice, as we know, allows an employee to give up a portion of their pay so that it is paid directly into their pension. That does not just attract income tax relief, as all pension contributions do; it also enables national insurance contributions to be saved on the amount transferred. So it is the contribution that working people pay every month that lies at the heart of this issue. Higher rate taxpayers continue to benefit from relief related to their tax rate of 40%. Basic rate taxpayers benefit less, since their tax rate is only 20%. We are talking, on Treasury estimates, about 850,000 basic rate taxpayers.
For a basic rate taxpayer, the 8% national insurance loss amounts to two-fifths of the value of their income tax relief. In absolute terms, the marginal cost of this policy is four times higher for lower-paid workers than for those on higher incomes. The problem goes further: this is a harsher blow to certain groups of savers than many had anticipated, particularly those repaying student loans. That is why I very much support Amendment 3 in the name of my noble friend Lord Leigh, which would prevent those repaying student loans from being hit by a double whammy. I will leave it to him to explain the detail.
Graduates begin repaying their loans once earnings exceed £28,745, at a rate of 9% if they are on the plan 2 scheme. If the Bill is unamended, graduates using salary sacrifice will no longer see that 9% effectively redirected into their pension via salary sacrifice once they exceed the £2,000 cap. For those individuals, the effective loss is not just 8% in national insurance but 17% at the margin.
This comes at a time when the newspapers are full of furious comment about the high interest rates—inflation plus a huge 3%—payable on plan 2 loans. The announcement over the weekend by Kemi Badenoch to support a cut in the rate of interest charged on some student loans issued in the decade up to 2023 is therefore most welcome and is a clear step toward addressing this problem, which the Government, distressingly, seem content to live with.
The interaction between that major issue of public concern today and this Bill on salary sacrifice comes through clearly in a comment from the director of the Chartered Institute of Taxation. She said:
“The change will disproportionately affect basic rate taxpayers because they will pay at 8% NIC on contributions over the £2,000 cap, compared with a 2% charge on higher earners. It will also disproportionately impact those with student loans who earn above the repayment threshold, as they will have incurred an extra 9% student loan deduction from their pay”.
At a time when we are urging people to do the right thing—to save, to plan ahead and to take responsibility for their retirement—the Government are choosing to hit lower-paid workers harder. That is the unavoidable consequence of how this policy operates in practice.
Worse still, it falls most heavily on a younger generation who already face higher housing costs, who paid for their university education and who now find work taxed more heavily under this Government’s jobs tax—last year’s £25 billion NICs changes, which we discussed in this Room and which we rightly warned would devastate youth employment. Because that prediction has proved accurate, especially for young people, the Government would be wise to listen to the concerns aired today and outside and make changes to this Bill. It is ironic in a way that we are considering this at the same time as the Pension Schemes Bill, which is designed to improve pension saving and the incentive to save. We are doing the opposite here: making pension saving harder, less attractive and less fair.
Our amendments provide a simple solution for the Minister. By exempting basic rate taxpayers from coming under the cap, we would ensure that the Government’s stated aim is achieved and that we modify what is in effect a regressive tax. Our amendment offers a simple, targeted means of mitigating the harm that this policy will cause to some of the more financially vulnerable people in our society and I urge the Minister to accept it. If he cannot, he should explain to the Committee why his Government are choosing to disincentivise people from taking responsibility for their own future at precisely the moment when state pensions are under significant strain, which is set to intensify in the years ahead. Lower savings today means lower retirement income tomorrow and greater reliance on the state for future needs.
I turn to my Amendments 2 and 15, which ask the Minister a very simple question. What precisely does the Treasury mean by a “higher earner”? Throughout the passage of this Bill, the Government have repeatedly justified this policy on the basis that it is targeted at higher earners. At Second Reading, the noble Lord, Lord Livermore, described the reforms as “fair and balanced” and said that they,
“protect lower and middle earners”.—[Official Report, 4/2/26; col. 1684.]
Similarly, the Explanatory Notes state plainly that the Bill
“limits the NICs relief available to higher earners”.
Those are the Government’s words, but nowhere in the Bill, in the Explanatory Notes or in the Minister’s speech is the term “higher earner” actually defined.
That is a serious matter, because the practical effect of this policy suggests that it reaches well beyond any intuitive understanding of what a “higher earner” might be. The Minister has already acknowledged that individuals earning £30,000 and below will be affected. Industry experts have warned that those earning between £30,000 and £60,000 are likely to feel the impact most acutely. Median earnings in the UK are around £37,000 and, in London, they are £10,000 greater. Given this, who are these “higher earners” to whom the Treasury refers?
Since the election, we have heard a succession of phrases from the Treasury: working people, ordinary earners, higher earners. The language shifts, but what has remained constant is the refusal to define these terms. When this House considered the national insurance Bill last year, we warned that the burden would ultimately fall on working people. That proved correct; and the same risk arises here that rhetoric about protecting lower and middle earners does not align with the actual distributional impact of the policy, and the Government are allowed to get away with it because they never set the goalposts in the first place. If the Government’s objective is generally to protect those on lower and middle incomes, that objective must be capable of scrutiny. Scrutiny requires definition. Without definition, we cannot assess whether the Government are meeting their own stated aims. That seems a basic requirement of transparency in fiscal policy-making. I look forward to the debate, and I beg to move.
Lord Leigh of Hurley (Con)
My Lords, I shall congratulate my noble friends Lady Neville-Rolfe and Lord Altrincham and the noble Baroness, Lady Altmann, on Amendments 1 and 2, then I will speak to my Amendments 3 and 16.
This Bill has a number of disadvantages to the economy and society, as it penalises pension saving and retirement security while, of course, leading to higher costs and a higher administrative burden for employers. It may also lead to some employers reducing pension generosity or even scrapping salary sacrifice schemes altogether, so it may well discourage and disincentivise good behaviour. One has to question whether the limited expected tax yield justifies the cost, particularly as we know that behavioural response will reduce the amount of tax generated, and it simply is not fair for many people, disproportionately affecting certain groups such as savers and lower-income earners.
However, the Government cannot argue that it was in their manifesto, because it was not. In fact, it was the reverse—the manifesto pledged no increases in tax, including national insurance. We can argue that it is important that we have a very good look at certain aspects of this Bill and try to point out its shortcomings, together with making some constructive and, I hope, helpful amendments. After all, it looks like some 44% of employees using salary sacrifice for pensions will be impacted by this measure. It is important that we look at the Bill in detail, as the Society of Pension Professionals—SPP—has warned the Government that planned restrictions to salary sacrifice could reduce retirement saving and increase costs for hundreds of thousands of employers and millions of workers. The SPP has warned that the changes are likely to reduce pension savings at a time when government figures already show that 15 million people are not saving enough for adequate retirement; that rises to 25 million if the state pension triple lock is removed.
The Reward and Employee Benefits Association has warned that this Bill will put strain on businesses and push millions of people into poorer retirement. In a survey it undertook, an overwhelming 99% of businesses said the organisation would be affected by the cap and 70% said this Bill would increase the administrative burden. Furthermore, a third of businesses expect the change will make it difficult for them to attract and retain talent. It has been described as a change from sleepwalking into a retirement crisis into speedwalking into one.
I appreciate that all I have said is somewhat of a preamble, but it needs to be said, and it will be said by me only once, although it applies to all the amendments we will discuss today and possibly on Thursday—although I gather the plan now is to curtail debate today if at all practical. Is the noble Lord waving at me? Does he not know either? Fair enough. I always pay attention to Government Whips waving at me.
I turn to Amendments 3 and 16—parallel amendments because of Northern Ireland—in my name and that of the noble Baroness, Lady Altmann. They deal with the complications this Bill brings in respect of student loans. I appreciate this is a little technical and complicated and may not be best resolved by debate in this Committee so much as by discussion between all relevant parties before Report. I thank my noble friend Lady Neville-Rolfe for setting me up to explain it all. I will do my best but, as I say, this may be a difficult format in which so to do.
Lord Mackinlay of Richborough (Con)
My Lords, let me make my declaration. I am a chartered accountant and chartered tax adviser, so such legislation is the thing I live for on a daily basis.
My noble friend Lady Neville-Rolfe has laid out the ambitions of pensions. Unfortunately, in the first 18 months of this new Government, pensions are seemingly no longer protected as something desirable—that is, something we wish on our population so that they can build for the future and have a good, well-funded retirement.
Let us consider what this new Government have already done. One of their first moves in their first Budget in 2024 was to lay out the framework for bringing private pensions into the net of inheritance tax. As an adviser, I have to say that, when my previous Government introduced a measure to take personal pensions out of IHT, it was a very generous measure, but it has, I think, proved its worth. I was somewhat sceptical— I am one of those people who likes a low tax regime—but having IHT-free pensions was always quite a generous measure. Over time, it has shown itself to be a very good measure, because people are contributing towards pension funds in a way they may not have been encouraged to do. That has to be to the good.
I am sure that I do not need to tell this Committee about a lot of the planning behind pensions and why people do it. The reason outlined by my noble friend Lady Neville-Rolfe for exempting lower rate taxpayers from this regime is a good one. I say this as a practitioner: if the thought is that this is some loophole that is massively exploited by the great body of UK taxpayers, that has never been my experience, I am afraid. I do not see levels of salary sacrifice that would be sufficient to have even put this on the radar in the first place, frankly.
Why do basic rate taxpayers pay into pensions? I am afraid that not enough do. Thankfully, the implementation of auto-enrolment under our last Government will, I think, bear fruit as one of the most positive footprints that we left. We will, in time, have hundreds of billions of pounds put aside in good funds. Nest has been a great success, offering a variety of funds that taxpayers can choose, from lower risk to higher risk, and there is even a sharia fund, which was news to me. No matter what, the whole spectrum of the UK taxpaying base in auto-enrolment will be building up a fund for the future. During our time in government, we thought pensions were a good; they will restrict the number of people who may be looking for or needing pension credit in the future, because they have built up a decent amount for themselves.
For the 40% taxpayer, of course, putting aside for a pension is almost a no-brainer, because the tax saving is a good in itself, even if one is putting into a slightly riskier equity-based fund. Because you protected it through a good amount of tax relief, the downside still makes taking a bit of a risk worth while. Again, over time, risk usually means a potentially higher return. For those stuck over that £100,000 to £125,140—whatever it is—threshold for the 60% rate, one does not really need to be a rocket scientist to know that using pension planning to try to get back below £100,000 is a good deal. Beyond that, at 45%, pension planning is a very good way to go. For the higher rate taxpayer, it is so obvious to do that type of pension planning. That follows some of my noble friend Lady Neville-Rolfe’s thinking that the higher rate taxpayer does not particularly need that additional help, even though I am never one to say that more taxes should be paid.
For the basic rate taxpayer, however, we need to encourage as much as we can. There is not much encouragement from the 20% relief; that is not very dynamic or exciting. Dare I say that if one stays a basic rate taxpayer, the risk of inheritance tax will potentially not fall on that type of family, given that you have two £325,000 thresholds and the relief for domestic property, potentially allowing £1 million for a couple? It is a broad-brush but perhaps reasonable guess that, if one stays a basic rate taxpayer throughout life, the £1 million threshold will probably be exempt from inheritance tax. It is exactly those people who need the help and support.
What we see with this legislation is not any grand plan for pension planning; there is a grand plan to take a little more money from a lot of taxpayers for the benefit of the Treasury. In so doing, I am afraid that this Government are in serious danger of destroying those really good foundations that we laid—with the support of the Labour Party at the time, broadly—in personal planning, particularly in auto-enrolment, and all that good work done over many years.
In support of my noble friend Lord Leigh of Hurley’s very clever observation, which had escaped me, about the recognition of income for the purpose of calculating income for the student loan, it may be that the Financial Secretary to the Treasury’s interpretation is that there is nothing to worry about and this is already covered and will never be pursued. If that is the case, a statement from the Floor today would be helpful in that regard. Even if there is some ambiguity, which I have no doubt that there is between this multitude of regulations —for national insurance, student loan and taxation purposes—I see no reason why the Government would not adopt this amendment as very sensible. I thank my noble friend for pointing out something that the drafters had perhaps not seen in the first place.
I will be speaking, no doubt, at regular points during the day, but these are my initial observations. The Government should be very careful: they are destroying a very good bedrock, which we created, of pensions that were to benefit many millions of people across this country. This is a small tax-raiser too far, which will bear dreadful fruit into the future.
Lord Londesborough (CB)
My Lords, I support all the amendments in the first group but will restrict my comments to Amendment 1 in the name of the noble Baroness, Lady Neville-Rolfe. This concerns the £2,000 cap in Clause 1, which unfortunately hits a crucial cohort of workers: those going through the gears, where their earnings are moving up from around £25,000 per annum to £50,000. There is a disproportionate impact on the younger end of the workforce—those getting promotions and taking on added responsibilities —whom we as a nation need to encourage to increase their pension contributions, given our rapidly ageing population. This cohort’s life expectancy may be nearer 90, if current trends continue.
There is also a disproportionate impact on our SMEs, which I will address in more detail later. Given the high preponderance of basic rate taxpayers in their workforces, the Bill will, as it stands, make growth, recruitment and retention of staff that much harder, at a time when they are still absorbing the £25 billion hike in employers’ national insurance contributions.
My final point at this stage is on bonus payments, specifically bonus sacrifice arrangements, which are a particular target of the Bill. This really is not smart economic policy, given our need for a performance-driven workforce, where bonuses on merit play a critical role in improving productivity, especially in the private sector. Frankly, they should also feature more, not less, in the public sector.
Lord Ashcombe (Con)
My Lords, clearly there remains a tension within government between the Department for Work and Pensions and the Treasury. As we heard at Second Reading, the DWP is focused on encouraging people to save more for their retirement, yet the Treasury continues to pursue measures to fill its coffers, while increasing the burden on both employees and employers yet again.
The Minister spoke of protecting ordinary workers yet, in many cases, the Bill does the opposite. It penalises individuals who are trying to act responsibly, and prepare for a secure and dignified retirement, by removing the very tool—national insurance relief—that was put in place to assist saving for a pension. With the average salary, as we have heard, being around £37,500, anyone on that income who sacrifices more than £2,000 into their pension will face an additional national insurance charge of 8% above that £2,000. That will be a penalty and the reality for all basic taxpayers.
It is difficult to imagine that the DWP can view this outcome with enthusiasm. Once again, the Treasury appears to be prioritising short-term revenue over long-term stability, leaving future Governments to address the financial consequences created today. It is precisely these workers—those on modest incomes who are doing the right thing by saving—who need the most support in building their pensions, rather than being pushed towards greater reliance on the state in the future.
For that reason, I strongly support, and I believe the DWP would agree—I have not spoken to the department —Amendments 1 and 14 in the names of my noble friends Lady Neville-Rolfe and Lord Altrincham, and the noble Baroness, Lady Altmann. Briefly, I also support my noble friends in their Amendments 2 and 15, having heard the arguments this afternoon concerning the definition of higher earners. It is simplicity to me that transparency is essential, as opposed to opacity, which can lead only to confusion. Therefore, I believe that this issue should be tied down.
Finally, I would also like to offer my support to Amendments 3 and 16 in the names of my noble friend Lord Leigh of Hurley and the noble Baroness, Lady Altmann. Many graduates, including my two sons, already shoulder a significant and in many cases unnecessary burden in repaying their student loans at interest rates that feel wholly disproportionate. It is not until they are paid about £66,000 that they start to pay down the interest. There are few graduates—probably even fewer in the current hiring climate—who reach this sort of pay quickly. I suspect it takes at least five years —that is the case for one of my sons on the fast track in the Civil Service—and much longer for the majority.
Baroness Coffey (Con)
My Lords, I somewhat understand where the Government are coming from in trying to get rid of salary sacrifice entirely—by the way, it is still available for employees of the House of Commons or the House of Lords for the on-site nursery. One thing that the Government seem to have missed out is that they have not provided a lot of information on how they have reached the figure of £2,000. It feels as if they are looking for £4 billion or £5 billion to pay for things such as getting rid of the two-child limit on universal credit—not child benefit; every child gets child benefit. It feels like a short-term measure, as one of my noble friends has just pointed out, to hit certain policy objectives before the next general election. The challenge here is the long-term consequences of where people are putting into their pensions today. The other thing the Government do not seem to have considered is that it is not usually employees who decide the percentage that they are required to contribute to the salary sacrifice scheme. That is normally decided by the employer.
More generally, we are starting to see this awful approach of people on rather modest earnings reducing the amount of money they put into a pension for the future, with all the knock-on costs that other noble Lords have pointed to, but I would go further. How much money is paid towards housing costs and similar is increasing at a significant rate, so it becomes this odd sort of choice where people are trying to do the right thing. Admittedly, this may currently benefit lots of people. That is why Amendment 1 is so important, instead of “How can I take from Peter to pay Paul?” We know the other significant cost of pension tax relief is to make sure that we do not have doctors and consultants reducing their number of hours. So those sorts of policy changes have already been made, and this Government decided not to do that, even though it applies to bankers and all the other people who earn significant amounts of money.
Before Report, I think it is worth the Government setting out in more detail where they got their figures from and why they have ended up at this point instead of just, fairly glibly, saying this will not affect earners. We need more detail. The information put forward by HMRC is basically an insult to everybody reading it by trying to suggest that somehow it gives us a proper tax impact and information notice. It really does not. If we approached this in a more evidence-based way, there would start to be more support and understanding of what the Government are trying to achieve. The Government are trying to find some more money, but at the moment it feels as if they are hitting younger people, people still at certain parts of their career who are already stretched, and this is the way that they are able to make a contribution to their future. As has already been pointed out, it may not be so good for higher rate—and that is okay; people make policy choices when they vote for parties, although, as my noble friend Lord Leight of Hurley pointed out, this was not in the manifesto. I would be grateful to the Minister if he could commit to a more detailed assessment to share with the Committee before we return to this on Report.
Lord Davies of Brixton (Lab)
I support the Bill. It is an eminently reasonable approach to the difficult financial situation in which we found ourselves when the Labour Government took office. No one likes increases in taxation—it is easy to say “No, no, no”—but given the outcome of the election, some increase in taxation was required.
I listened to the debate with interest, including the points raised on student loans in relation to Amendments 3 and 16. I do not understand it, but I hope that my noble friend the Minister does and that he can give a satisfactory response.
I am a bit concerned when people talk about the Bill “penalising” people. Taking away an advantage struggles to be a penalty. The idea of salary sacrifice makes no sense; it is regulatory arbitrage and a sort of kludge that has no real justification. It is also unnecessary. The idea that the pension system will suffer greatly from the removal of this particular tax relief is fanciful. Some people regard the golden age of pensions as having been 10, 20 or 30 years ago; virtually no one then had salary sacrifice and yet schemes boomed and people saved for retirement. We cannot sustain an argument that providing an adequate pension for most people requires this form of salary sacrifice, particularly when £2,000 is being allowed.
As I said at Second Reading, I disagree with the idea that this is, in some way, a mortal blow to pensions— I may exaggerate slightly, but there was continual suggestion that this was a severe blow to people’s attempt to provide themselves with a decent pension. It is interesting that people who are arguing to keep this salary sacrifice are those who, at the same time, oppose the triple lock, and yet the triple lock is doing far more than this would do for people on low incomes to secure an adequate income in the future, so I do not accept that argument about impact.
The important issue is that this bit of tax relief on pensions should be seen in the context of the overall tax relief on pensions. What is the right level overall of providing relief through the tax system for pension provision? We all know it is substantial; it is enormous. If you count all the different forms it could take, it comes to about £90 billion. When the scheme has matured, this will take away £2.5 billion. That is why I said at Second Reading that it is marginal; it is not crucial for the future of pensions.
The issue of tax relief on pensions is controversial. Think tanks love a report on tax relief on pensions. None of them is proposing an increase in tax relief on pensions, yet this is the way that we are heading. The Government’s figures—which no one has disputed—suggests that more and more people will seek more and more salary sacrifice to get more and more tax relief on pensions. Yet when the think tanks look at these issues, they say, “Well, no, it should be targeted towards the lower paid”. If anyone thinks that this will cause problems—I am looking at the noble Baroness, Lady Kramer; I think the Liberal Democrats have supported, or toyed with, the idea of having a flat-rate tax relief on pensions—I suggest that moving to a flat-rate tax relief on pension contributions will cause an absolute nightmare.
There is one point here that I accept. My noble friend the Minister can take it as a helpful suggestion rather than a criticism, but the use of the term “higher earner” could have been judged better. Noble Lords will be pleased to know that I have a spreadsheet, which calculates the impact that people suggest this measure is going to have. Of course, the 2% and 8% feature means that there is a kink in the line of the relief that you get from salary sacrifice because, up to a certain level, you pay 8% contributions through national insurance and you are getting the relief at 8%. Then, after that, it is 2%. It is not that the Government are seeking out people to charge more money; it is the structure of the system.
Let us look at the figures. I sometimes have problems in these debates when other speakers quote figures because it is difficult to understand them without seeing them in writing with some explanation. I think that, in general, there should be a ban on quoting figures in these sorts of debate. However, I am going to quote some figures. The median level of contributions to a pension scheme is 5%—that is, between 4% and 6%—on median earnings below £40,000. Now let us take the higher figures: someone paying employee contributions of 6% with earnings of £40,000. They are using salaries in full on their contributions. For them, the change will be an extra £32 a year. Those are the figures we are talking about for those on median earnings and those on median contributions.
As has been mentioned, bonus sacrifice is clearly a separate issue. This is where the legislation is required. It is being exploited in these circumstances. The bonus should be enough. The bonus is of great value. Some people in the City get vast bonuses. The idea of using that money to exploit this illogical tax relief through salary sacrifice is abhorrent.
I support the legislation. The term “higher earnings” could have been handled better but the whole issue—people on median earnings paying very little more and complicating the system in order to remove basic rate taxpayers; perhaps my noble friend the Minister can tell us about the impact it would have on income—has been over-egged; that was, I think, the phrase I used before. This is an eminently reasonable measure to address the country’s financial problems.
Lord Fuller (Con)
My Lords, the noble Lord said that he cannot see the sense in this. Why do we have this incentive in the tax system? The answer is that it is the role of government to incentivise good behaviours, which include saving for your retirement, trying to climb the ladder and trying to do better for yourself, not least because, in so doing, you reduce your reliance on the state in later life. That is the sense of the salary sacrifice process.
This Government have perpetrated a series of attacks on youngsters at the start of their careers, graduates and people making a start in their working lives. The Renters’ Rights Act has driven up rents. The Employment Rights Act has made it harder for businesses to take a chance on somebody who may be unqualified or changing role. The Government are putting youngsters into unemployment with the jobs tax. Now this slim Bill will add many more cases—I am going to list them in a minute—of intergenerational unfairness. Let nobody say that Labour is on the side of the youngsters who want to get on.
Baroness Kramer (LD)
My Lords, I made my views on this Bill fairly clear at Second Reading, so I am going to try to observe the discipline of not repeating my Second Reading speech. I am sure that I will not be absolutely 100% on that, but I am going to try.
I want to look first at this group of amendments. Amendments 1, 2, 14 and 15 put forward by the noble Baroness, Lady Neville-Rolfe, are particularly relevant because I do not think that at Second Reading we came away with a clear understanding that basic rate taxpayers were going to be significantly caught by the changes in this Bill. The focus on higher earners— I agree very much that we need “higher earners” to be properly defined—leaves us with a mistaken impression. I hope very much that the Government will provide some degree of clarity—the noble Baroness, Lady Coffey, called for the evidence—on who is impacted and how they are impacted. We ought to have that information in front of us. I will be troubled if this captures people on basic rate tax, given the pressures that they already face.
I would like to focus much more strongly on Amendments 3 and 16, because I do not think that at any point at Second Reading we addressed the impact on graduates repaying student loans and the impact on their take-home pay. I want to thank a gentleman called Tim Camfield who did some calculations and forwarded them to me because, as I worked through his calculations, it seemed to me that he had to be right. He wrote in the context of reading a response from the OBR to what I understand was an FOI in which it said that it did not believe that the Bill had any impact on student loans. It seems to me that very evidently it does and we need to know that. If the Government do not intend it and are going to have a workaround that will prevent it, then frankly we need to know that as well.
We all know that students have been under extraordinary pressure and that the Government openly have frozen the starting repayment threshold, but this, in effect, if Tim Camfield and others are right, would be a backdoor, further blow to this group. Whenever people say “student loans” and you are a Liberal Democrat, it is important to say—and I do not want to give a speech on our new policy—that my party recognises its role in creating the student loan repayment scheme. But frankly, the scheme is so changed, and graduates are under such pressure, that we now recognise that it is broken. I will not go through our policies—they are extensive—to completely reform that system.
I look now to the Minister to give us some real clarity, both on who is impacted and how extensively—how a normal person might read that as being an ordinary worker on a relatively modest income, rather than just a higher earner—and on the issue of student loans. I have some information on the distributional analysis that I will use in group 3 but, on the principle of trying not to repeat myself constantly, I will wait until then.
Lord Leigh of Hurley (Con)
My Lords, prompted as I am by my noble friend Lord Mackinlay, may I just take a moment to remind the Committee that I am a member by qualification of the Chartered Institute of Taxation and have received very helpful briefings from it?
The Financial Secretary to the Treasury (Lord Livermore) (Lab)
My Lords, it is a great pleasure to respond to the debate on this first group of amendments. I thank all noble Lords who have contributed.
This first set of amendments, in the names of the noble Baronesses, Lady Neville-Rolfe and Lady Altmann, and the noble Lord, Lord Altrincham, seeks to exempt basic rate taxpayers from the Bill. I have listened closely to the points raised and the concerns expressed during this debate. The Government have ensured that the measures in the Bill do not affect the majority of basic rate taxpayers. Around 74% of basic rate taxpayers currently using salary sacrifice will be protected by the £2,000 cap, and almost all—95%—of those earning £30,000 or less will be protected. The small number of basic rate taxpayers with contributions above £2,000 will continue to benefit from employee national insurance relief, worth £160 a year, in addition to the full income tax relief that they receive on their pension contributions. Of the small number basic rate taxpayers who are impacted, half will face an annual additional national insurance contributions liability of less than £50.
While we recognise the intention behind the amendments laid by the noble Baronesses, Lady Neville-Rolfe and Lady Altmann, and the noble Lord, Lord Altrincham, exempting basic rate taxpayers would, in practice, be operationally challenging and add significant further complexity to the tax system. That is because the tax system can confirm which band an individual is in only at the end of a tax year, when reconciliation of their income tax liabilities has taken place. Adding complexity to the system would also likely lead to an increase in costs for employers, as they would be required to bear the burden of identifying the full extent of their employees’ potentially multiple sources of income.
This leads me to the amendments in the names of the noble Baroness, Lady Neville-Rolfe, and the noble Lord, Lord Altrincham, which seek clarity on the basis on which the Government consider certain employed earners to be “higher earners” for the purposes of the national insurance charge, as well as how the contributions limit reflects that assessment. The Explanatory Notes set out that the policy rationale is to limit
“the NICs relief available to higher earners on employer pension contributions made through salary sacrifice arrangements whilst protecting lower earning pension savers by introducing a £2,000 threshold. Most employees and their employers who make typical pensions contributions via salary sacrifice will be unaffected”.
This is indeed the effect of the Bill. Some 87% of pension contributions made via salary sacrifice above £2,000 are forecast to come from higher and additional rate taxpayers. Some 74% of basic rate taxpayers using salary sacrifice will be protected by the £2,000 cap, and almost all—95%—of those earning £30,000 or less will be protected.
Let me turn lastly to the amendments in this grouping tabled by the noble Lord, Lord Leigh of Hurley, and the noble Baroness, Lady Altmann. They seek to exempt salary sacrificed pension contributions over the limit from being included in student loan repayments definitions to employees making student loan repayments. The salary sacrifice changes made through the Bill equalise the national insurance contributions treatment of salary sacrifice above the cap with other types of employee pension contribution, which are counted as earnings when calculating student loan repayments.
There may or may not be good arguments for or against that, but we do not consider this Bill an appropriate vehicle through which to amend the basis of student loan repayments. The basis of calculating income from student loan repayments is set out in separate regulations, and we do not believe that this Bill should seek to vary that. It is also the case that, of employees making contributions via salary sacrifice, younger people are much more likely to be fully protected by the £2,000 cap than those over the age of 30. Some 76% of those in their 20s who use salary sacrifice are protected by the cap, compared to half of those aged 30 and above.
In the light of the points I have made, I respectfully ask noble Lords to withdraw or not press their amendments.
Baroness Neville-Rolfe (Con)
My Lords, I am pleased that we have begun Committee by addressing this issue and grateful to all noble Lords who have spoken. I am grateful to my noble friend Lord Leigh of Hurley, who seemed to be saying—I think with support from outside bodies—that the Treasury’s financial estimates were over-optimistic. That may, of course, be true of the figures that the noble Lord, Lord Livermore, has kindly given us, which we will obviously need to have a look at, on the effect of the change.
The difficulty as I see it is that the policy remains vague. Its impacts are largely unknown and the income group it is intended to capture is undefined. The Treasury’s assessment of how it will operate in practice has been inadequate. It is a complex mechanism by which to raise a relatively modest amount of revenue and does not take effect until 2029. It is a tool, if not a very sensible one, designed to make the Chancellor’s sums add up, rather than a longer-term policy. Even if the Government succeed in raising anything like the figure set out in the Treasury note, the projected yield declines sharply within just a few years of implementation.
There is also an issue of definition. I think the potential cost is greater. As the noble Baroness, Lady Kramer, said, there is a risk that middle and lower-income workers, and those paying basic rates of tax, will be drawn into scope. After all, this is a dynamic situation—we will come on to discuss whether there are ways of tackling that—but it could have serious consequences, and we would need to come back to the point about pension saving, long-term adequacy and, ultimately, future liabilities for the state. There is also an issue about irregular payments—“bonuses” was the word used by the noble Lord, Lord Londesborough. The majority of bonuses, in my experience, are small, as I know from my time at Tesco, but they can be used usefully to invest in pensions.
The absence of any safeguard in the Bill to prevent basic rate taxpayers being captured is a significant omission. If the Government are confident that such individuals will be protected, they should be willing to put that protection in the Bill. The noble Lord, Lord Ashcombe, rightly supported the need for transparency, and of course Amendment 2, which requires Ministers to define “higher earners”, would achieve just that. Even the noble Lord, Lord Davies of Brixton, agreed that there was a “kink in the line”.
Her Majesty’s Opposition are very concerned about the unfair impact on those struggling to pay their student loans at a rate of interest which is impossible to justify. The Government must look seriously at how to mitigate this, as my noble friend Lord Leigh of Hurley explained with his customary vim, and to do this in the Bill—not promise to do something elsewhere. This is a big issue that has been raised and it has to be solved. We are very sympathetic to those with big debts, which they will have to pay off under the loans scheme, so a way needs to be found to help them.
There is an ambiguity, as my noble friend Lord Mackinlay of Richborough said from his position as a tax expert, and we need to listen to him. He also warned of its damaging implications, on top of those already introduced for IHT on pensions. This is part of a wider attack on pensions which it is important to do something about if we are to tackle the problems of long-term pension sustainability.
I beg leave to withdraw my amendment, but I may need to come back to this on Report, as it is at the heart of the acceptability of this Bill.
Lord Leigh of Hurley
“(6DA) Contributions to pensions where employees are not offered alternative compensation are not to be treated as optional remuneration arrangements.”Member’s explanatory statement
Where an employee has the option of a cash allowance or additional pension contribution, that would be an optional remuneration arrangement. But where no cash alternative is offered then there is clearly no optional arrangement and this amendment would therefore make it exempt.
Lord Leigh of Hurley (Con)
The purpose of the Bill is to catch salary sacrifice schemes. As we discussed in the previous group, this is where an optional remuneration arrangement has been made, but there are instances when an increased pension could be offered to an employee and no option is offered for the cash increase in salary. That is the area that I am exploring in my amendments.
In these circumstances—according to the Labour Party’s manifesto, the drafting of the Bill and all the Explanatory Notes—I do not think there is an intention to change the national insurance treatment. Indeed, this is clarified in the policy background sections of the Explanatory Notes on the Bill issued by the Government. This amendment, tabled by me and the noble Baroness, Lady Altmann, seeks to make that clear and cannot be seen as controversial.
Amendment 4 is easier to explain than Amendment 3, so let me have a go. I accept that Amendment 3 is not easy to understand, and I am not sure I understood the Minister’s response to it. It would be very helpful if, before Report, he could clarify whether he agrees that, as I suggest in Amendment 3, the definition of earnings will be affected by the Bill, and whether the Government will address that issue.
The Bill is predicated on the definitions of optional remuneration arrangements. They can include company cars and—as the noble Baroness, Lady Coffey, said—assisted places in nursery, medical insurance and other areas, but the Bill makes it clear that we are focusing here on salary sacrifice. The reason for my amendment is that there may be some people who achieve an increase in pension contributions but not through salary sacrifice. In my view, an optional remuneration arrangement has not been properly scoped or defined for the purpose of the Bill.
Perhaps it is easiest to understand this concept when thinking about a new employee. Such a person will be negotiating their compensation with a potential employer. Let us say they are offered a salary of £50,000 and a £5,000 pension contribution. They might feel that this is insufficient payment and seek a higher salary. The employer could refuse that on the basis that all people of that rank in their organisation receive a sum of £50,000 and they have no flexibility—but they may offer an increased pension of £10,000 rather than £5,000 to reach an agreement. How is that negotiated figure of £10,000, which was previously £5,000, to be treated? What if the employer said, “I will reduce the salary to £45,000 and give you £15,000 in pension”? Is this an optional remuneration arrangement, particularly with a prospective, rather than actual, employee?
Similarly, let us look at termination settlements. An employee may receive a lump sum in lieu of any other claim and might be offered an excess amount over the normal £30,000 to be paid directly to the pension scheme. Is that an optional remuneration arrangement?
Let us consider something perhaps closer to home for the Minister: cases where collective bargaining takes place. There might be two offers on the table: one is for a 5% increase in pay but will keep employer pension contributions at 8%, and the other is for a 4% increase with an increased employer pension contribution of 10%. If the collective bargaining unions agree on the latter, are we to assume that this is an optional remuneration agreement? I would assume not, but it is not clear.
In the negotiations of remuneration, what if a person agrees with an employer that they will not take any increase in salary but they want a greater pension payment? That is not salary sacrifice—which is in the heading of the Bill and peppered throughout the definitions used in the Bill and the Explanatory Notes—but does it qualify as an optional remuneration arrangement?
This is a probing amendment to try to get some clarity into the Bill. Clarity is needed because there is so much in the Bill that, frankly, does not seem to have been considered as it relates to people’s working lives.
Amendment 33, in my name and that of the noble Baroness, Lady Altmann—and, yes, in this group—deals with the very difficult situation where a person has a number of employments. It seems a bit disappointing that the Bill does not address this obvious problem. Perhaps the draftsman had only one job—I do not know. National insurance contributions are typically calculated weekly or monthly for most employees, and calculated separately by different employers, assuming such employees are not part of the same group; if it is all one group company, it is done by one head office, typically.
The question arises: how will the £2,000 limit be applied across different periods and employments? This could be covered in regulation later, I suppose, which seems the Government’s favourite approach to much of legislation, but it is right to discuss this in Committee and encourage the Government to put their thinking cap on now to try to get it right so that there can be proper consultation and scrutiny before the legislation is enacted.
Where employees are paid monthly, should that employer apply 1/12th of the £2,000 to each month’s salary-sacrificed earnings or wait until the month in the year in which that amount has exceeded £2,000? Likewise, as the noble Lord, Lord Londesborough, questioned, what happens when an annual bonus is paid? Does that distort the £2,000, which I assume is for the year to 5 April? The bonus could be paid in May or June, completely distorting all the figures. If an employee changes employment part way through the year, how does that work in practice? Does the amount sacrificed in the old employment carry over to the new employment, or should the employee benefit from two separate caps, which will be the requirement for information to be passed from one employer to another? How will HMRC cope with this? Currently, no information exchanges are available.
Then, of course, there are a number of us—I include myself—who hold down more than one job at a time. I declare that interest, although I am not caught by the Bill. Will the £2,000 annual cap be split between each employment, or can employees benefit from two separate caps so that each employer can offer £2,000—which might encourage some slightly unexpected behaviour of people taking lots of jobs, or with subsidiaries or associates, as a clever avoidance trick? There is already incentive within the NI system to do this, as separate allowances exist for separate employers.
We also have to think about financial privacy here, as information would need to be shared across different employers. I raised earlier the problems facing us where an employee does not actually sacrifice salary but still makes a pension contribution, and it is not clear what happens if an employee enters into a bonus waiver in exchange for an increased employer pension contribution. It is complicated, because the employee has no legal rights to the bonus, so there is nothing to sacrifice. What is the Government’s view in these circumstances?
All in all, one can see an administrative nightmare all around. It would be extremely helpful if these issues could be addressed by the Treasury in guidance, setting out the basis on which the Treasury considers how the Bill will apply before it comes into force, hence my amendment.
While on my feet, I support the amendments tabled by the noble Lord, Lord Fuller, which seem pretty clever to me. I am somewhat annoyed I did not think of them myself, because it is pretty obvious when you read his amendments that it must be right—I am supposed be the chartered accountant—that there should be some spreading to allow for circumstances where one year was not a good year and another was. That seems only fair. I beg to move.
Lord Fuller (Con)
My Lords, I rise to speak to my Amendments 4A, 4B, 17A and 17B, and the associated review clause, Clause 29A. I will also speak to support Amendment 33 in the name of the noble Lord, Lord Leigh of Hurley.
Taken together, these amendments try to address the practical workability of proposals for employers with employees who have multiple employments and fluctuating income, and to ensure consistency with other parts of the taxation system while being consistent across Great Britian and Northern Ireland.
How easy it must be for the huddles of Ministers and civil servants sitting in their little meeting pods in that ground floor cafe at 1 Horse Guards—or perhaps dialling in from home, having taken the dog for a walk—to tinker with their spreadsheets and to come up with policies viewed through the lens of their personal experiences but which do not stand up in the real world. We have new tax policies that have damaged the national economy and growth. This Bill in particular, however, damages incentives for individual employees and companies for which they work; these are incentives to work hard, to climb the ladder, to improve yourself and to save for a secure retirement, and incentives for employers to attract the best talent.
As we have heard, it is not just the people on 100 grand that this policy affects—although it raises their marginal tax rate to 70% if they are paying off a student loan—it affects a whole raft of people. With the minimum wage now set at over £26,000, millions of ordinary hard-working people—the sort of people this Government say would escape higher taxation—will now be snared in this net, as the Daily Telegraph has reported. It amounts to a new tax on workers; this much we know. But my amendment focuses on the potential unfairness to a particular type of hard-working employee that makes it nearly impossible for their employers to administer it: an employee juggling several jobs.
How do the Government intend to deal with this and make fair the practical unintended consequences and perverse outcomes? Let us take the example of the employee who works several jobs. How will her employer know when or if she has maximally sacrificed her two salaries without reference to the other? That point was made very ably by the noble Lord, Lord Leigh of Hurley. The noble Lord also identified the privacy issues that come with this—which I wish I would have thought of.
Let us take another example, of an employee engaged in seasonal work who wants to save monthly into a pension on salary sacrifice. How does he set his regular contribution at the start of the year without knowing whether he will bust his allowance later on? In his winding on the previous group, the Minister said that you will never know the band until the end of the tax year--well, quite.
What about the employer who wants to do the right thing by his graduate employees and knows how difficult the job market is for them right now? Let us say he wants to attract the best talent by offering accelerated repayments of student loans by way of a salary sacrifice opportunity. We have a colleague in this House who is a graduate, and his graduate loan is running away; he is paying off £400 a month and still the debt is getting larger. We must help these people.
What about the youngster saving for a pension? As I said at Second Reading, my daughter’s boyfriend is no fat cat; he is living in a flat share with people he does not know in Brixton—I do not know whether the noble Lord, Lord Davies of Brixton, ever knocked on his door as I invited him to do at Second Reading. But ask his opinion on this and he will say that instead of improving his own financial security—and perhaps that of my daughter in due course—by reducing his dependence on the state in later life, his ability to save for his future and to progress now is weakened. These are practical and personal examples; each of them damages that incentive to work hard and save hard. That is bad enough.
However, this Bill further discriminates against the private sector worker who needs to save for his own retirement under the direct contribution system, when public sector employees have the taxpayer pitching in another 20% to their pot. The ham-fisted way this Bill ignores the real-life complexities for these real-life people and their real-life examples that exist outside the comfortable, monthly-paid final salary pension world shows how the Treasury views these things through its own particular lens.
Lord Mackinlay of Richborough (Con)
Perhaps I may make some comments on Amendment 33 put forward by the noble Baroness, Lady Altmann, and my noble friend Lord Leigh. My noble friend recommends that there be some Treasury advice on this. I do not think Treasury advice is good enough. Surely we are in the thicket of drafting legislation. Let us have those rules very open and clear within the legalisation before us.
I am confused about what is intended here. It is intended to be a £2,000 limit for the employee across all employments? At the wind-up of the previous group, the Minister, the Financial Secretary to the Treasury, quite correctly said that there would be excess complication in the system proposed by my noble friend Lady Neville-Rolfe’s amendment because an employer would have to know about their employees’ tax arrangements and whether they had rental income or income from other employments or investments. That was a very reasonable observation by the Minister. However, this legislation is, as it stands, somewhat silent on a similar complication that would exist across multiple employments.
There is an attempt to smooth out monthly variations in the directors’ arrangements for national insurance calculations, because directors are obviously able to adjust their income a bit more fluidly. I am sure that the Minister is aware that if a normal employee has a very big bonus, potentially in one month, the monthly threshold for maximal class 1 deductions for national insurance will be breached for that month and there will be technically an avoidance of national insurance, because the following month, when employment income goes back to a normal level, full national insurance would be taken. For those able to manipulate their income—and I use that advisedly in a broader sense, but directors can have a little more influence on how they are remunerated—there is a procedure within legislation to iron out those peaks and troughs on an annual basis.
Accepting within the tax and national insurance legislation that a normal employee should be able to benefit from a big peak one month and avoid national insurance, is it the intention that across multiple employments that £2,000 per year will be available to each employment? I think that, as the Bill stands, it does, and I welcome that, because it almost matches what happens in other national insurance legislation applying to an employee. However, it will not be good enough simply to have Treasury advice post-legislation. I would rather that that be clarified today so that we can discuss it further and amend as appropriate on Report. However, my thanks, as ever, go to my noble friend Lord Leigh and the noble Baroness, Lady Altmann, for highlighting the point in question, because it is what life is all about. Currently, it is not uncommon for people to have a multitude of employments.
The main things that I want to discuss on this group are the amendments put forward by my noble friend Lord Fuller—Amendments 4A, 4B, 17A and 17B —which all cover aspects of a similar theme. Call me simplistic, or perhaps old-fashioned, but I would prefer there to be similarities in different parts of the tax system. We have accepted in the tax system the three-year carrying forward of unused pension contribution relief within income tax. It used to be £40,000 a year; now, it is £60,000, and it remains unaffected thus far by two Budgets. I do not want to give Chancellor Reeves any ideas for the future but that sum of £60,000 seems to have survived two Budgets, so perhaps we may live in some hope. In income tax regulations, we have a situation where you can carry forward three years of unused relief, so, in year 4, one could—if one had sufficient income and this was a sensible thing to do in the tax regime in which one found oneself for that year—make a contribution of £240,000. The Treasury is very comfortable with that and, so far, there have been no efforts to amend that in the Budgets we have seen.
I go back to our discussion of the basic rate taxpayer, who may have multiple employments, who may be between employments and who may have both good and bad years. It would seem to stand to reason that we should have a similar idea of carrying forward to allow that sum of £2,000, as it currently stands. Obviously, I would rather it were higher; other amendments laid by noble Lords seek to amend it to £5,000 or £10,000, but I am talking just about the £2,000 limit. I know that my noble friend Lord Leigh gave some examples from real life but there may be situations where, for whatever reason, a pension contribution or a salary sacrifice cannot be made because the taxpayer—for example, a student, and potentially a newly employed one at that—simply needs the cash that year and is prepared not to have the tax and national insurance relief.
Again, this would be neither a difficult nor unusual situation. Someone’s child may be getting married, or they may need private healthcare because the NHS is not providing what is needed. Whatever it is, there are a multitude of real-life situations where cash may be king for a year. Following the income tax arrangements, surely it cannot be unacceptable for that small £2,000 limit to go forward for three years in exactly the same way so that the national insurance shield—that is, the benefit of making a contribution—is at least maintained for years when it was not needed.
Drawing on my professional experience, I can be absolutely sure that many of these brought-forward years are never used. They are used on a “first in, first out” basis, so year 1 carries forward to year 4. If it is not needed to be used, that falls out of bed, then you have years 2 and 3; in the fourth year, if any years are unused, you are carried forward to year 5, whereafter year 2 disappears. It is extremely rare for the full carry-forward to be used. The amounts involved in this sensible carry-forward measure proposed by my noble friend Lord Fuller seem very reasonable and not that costly for the Treasury, whose demand in all this has nothing to do with pensions but is about raising cash. I ask the Minister to look at this carefully—not today, obviously, as I am sure he will say no to most everything—on Report, to see whether we can consider this matter more carefully.
Finally, I go back to the amendments in the names of my noble friend Lord Leigh and the noble Baroness, Lady Altmann. If there is an intention behind the multiple employment arrangement, let us please see it in the Bill, not just in guidance from HMRC at a later date.
Baroness Altmann (Non-Afl)
My Lords, first, I need to declare my interests as set out in the register as a non-executive director of a pensions administration company and as a board adviser to a pension provider.
I believe that the Bill is premature—the extent of the amendments being proposed to it is evidence that it has been rushed, and I do not quite understand what the rush is, given that the policy is not intended to start until 2029. I must admit that I immediately thought at the Budget, when the measure was announced, that it was simply a means for the Chancellor to find some revenue to make the books balance in the way that she had hoped. That is not necessarily a criticism, I just felt that it seemed to be the reality. Then suddenly, a few weeks, effectively, after that Budget, we get the primary legislation.
I apologise to the Minister because I have enormous respect for him and I know that he has a very difficult task. I think he understands very well a number of the points we are making, but so many of the issues we are covering here do not seem to have been thought through. The list of potential banana skins and uncertainty seems to be growing by the day, and the practical issues simply have not been recognised, let alone resolved, as has already been evident. We will come to more as we go through Committee.
Let us just consider the risks highlighted in some of the amendments. For example, Amendments 4 and 17 from my noble friend Lord Leigh, to which I have added my name, are trying to clarify what is actually caught by the Bill. If an employer increases workers’ pension contributions, will it automatically be assumed that that was in some way a salary sacrifice? The employer may just have decided to increase its contributions for some other reason. How will we know? How will anyone know?
The uncertainties do not stop there. What about Amendment 33, to which I have also added my name? If someone has multiple jobs, how will anyone be able to track the salary sacrifice pension contributions made through a tax year? We will come on to what happens when someone changes jobs.
We saw in the previous group the effect on student loan costs for students. I know the Minister said that can be dealt with elsewhere in regulations because those student loan rules are set in other regulations, but if they are not in the Bill then they will be caught, it seems to me. I did not hear an argument that says they will not be.
Who is responsible for compliance? Who is responsible for reporting to HMRC? Again, we have heard about the problem with privacy. They are just the uncertainties that we are trying to sort out with some of these amendments.
Then we have the unknowns, which seem to be skirted over. We certainly know that take-home pay will fall for a number of workers who currently get salary sacrifice, either by the 2% or the 8% of the national insurance contribution offset they will potentially lose. Employer costs will rise.
I have huge respect for the noble Lord, Lord Davies, and all the calculations he does, and I recognise that, in some ways, the amounts of money, as he correctly calculated, perhaps seem rather small to us. However, as an economist, I know that decisions, incentives and behavioural changes occur at the margin. It is marginal changes, however small, that can make a significant overall impact over time. If employer costs are rising because they are paying extra national insurance on the pension contributions that they have always been making, it is bound to affect future pay rises and employment levels. We have no modelling of how much that impact might be.
Lord Davies of Brixton (Lab)
I spend most of my time in these debates about tax relief on pensions defending the existing system, because the people I tend to mix with regard that tax relief as grossly unfair. It obviously gives far more to the higher paid than the lower paid, and that is why there is widespread discussion of having flat-rate tax relief on pensions. If we were starting from scratch, I think we could do that, but we are not. We have to start from where we are.
Where we are is in having extremely high levels of, effectively, government subsidy for people to save for retirement, but that begs the question: what is the right level of tax relief for pensions? Does it just happen to be that we have alighted at the correct level, or is that an issue we are not allowed to discuss? Putting words into the mouth of the noble Lord, Lord Fuller, he seems to be adopting the argument: “The more the merrier—let’s increase it by even more”. No, there is a genuine question here. What is the right level of tax relief to encourage people to save for their retirements? It is a reasonably practical debate and, on this side, we have come to the conclusion, possibly as an interim measure, that it should be a bit lower than it is currently. That certainly does not justify the doom and gloom about this particular change—I have made my point several times.
I am no longer a small business person, but for 30 years I was and I employed people who had multiple jobs. It is not a new issue. There is nothing new about the idea of employers having to cope with the complications of the national insurance system for people who have multiple jobs, particularly where, even with two jobs, their total income is more than the £1,250 that it is at present. It is not a new issue that employers are going to have to deal with. In principle, there is an additional complication; they have to sort out where the £2,000 limit applies. However, it is reasonable to expect employers to undertake those tasks. To be honest, I do not think that an ice-cream salesman is really a genuine example, but I may be wrong.
Lord Fuller (Con)
I take my territorial designation from Gorleston-on-Sea. When I was a boy, there was nothing better when the sun was out than going down to Della Spina’s, the ice-cream place. It is not just about ice cream; there are stately homes and all sorts of things that work with the weather. That is why I chose the example of the umbrella salesman or the ice-cream vendor. There is a whole part of the UK economy that depends on the weather. We have the most unpredictable weather, there are the most turbulent income and costs associated with that, and that boils down into variable emoluments. It is not just the market gardener or the farmer; it is the people involved in hospitality or whatever. To say that it is trivial demeans the pubs, the restaurants, the stately homes and that wider part of the visitor economy, which is particularly visited on the coast and in coastal communities. I wonder whether the noble Lord would like to reflect on the somewhat dismissive way in which he put that huge part to one side. Millions of people work in these sectors; they would be disadvantaged by the Bill and that needs to be recognised.
Lord Davies of Brixton (Lab)
I accept the noble Lord’s reprimand. I was actually making another point, which is about how many ice-cream salespeople are operating salary sacrifice arrangements. That may not be immediately germane. In fact, the remarks that the noble Lord just made support my point. Those part-time employees and part-time employers are already having to cope with the problems that arise from multiple employments and how the national insurance system is not, in truth, tailored very well for those circumstances. I accept that.
Lord Mackinlay of Richborough (Con)
I would like to assist the noble Lord, Lord Davies, on multiple employments. For an employer faced with an employee with multiple employments, which is not uncommon, it has no reference at all to the individual employer—it is of no interest. An employer runs a payroll scheme only for the amounts that that employer pays that employee. If there is a second employment, it is for that employer to deal with how much they are paying that employee. There is no interaction between the employers to say, “Do a management of NIC”. This goes to the heart of the problem with Amendment 33.
There is only one example where an employer has to take any notice of multiple employment, which is when their employee may have a second employment that is above the ceiling for paying the maximal national insurance. That is where you have a system of form CA72A, which is supplied by the employee to the DWP. The DWP may not actually do anything about it; I have found in most cases in my professional career that the DWP seems to lose the paperwork and the employee has to make an after-year claim for the excessive NIC that has been deducted. That is the only example where the second employment may receive advice from the DWP to say, “Ah, only deduct 2% from this employee because they are paying maximal amounts on a primary employment”. I wanted to clarify the current situation across national insurance administration for double or triple employments. I hope that is of assistance.
Lord Davies of Brixton (Lab)
Yes; I thank the noble Lord for his advice. As I said, I have operated the system myself, and so he is really just making my point: the structures are there to deal with multiple employments. It is not being introduced to the issue by this particular measure. Obviously it would be more complicated with this measure—I accept that, and I look forward to my noble friend the Minister’s response on that issue—but it is not a new issue.
Baroness Kramer (LD)
My Lords, as with the previous group, the noble Lord, Lord Davies of Brixton, made a comment on what he thought was Lib Dem policy; it might be—I am just not sure. We have discussed simply kicking out all this complexity and having a flat rate of relief on pensions. After listening to the last debate, I think that that has probably accumulated a lot of votes from around this Room, because the complexity that we have had described under this group of amendments is absolutely extraordinary. The noble Baroness, Lady Altmann, referred to the banana skins, and I think the noble Lord, Lord Leigh, talked about it being a nightmare. I am troubled that all of this is being left to consultation with the industry and to future regulation and future guidance, as if it can all be absolutely sorted with a bit of quiet attention. But we have heard the problems of how you deal with the many cases where people have multiple employers.
The noble Lord, Lord Mackinlay, made it clear that it is a relatively small handful of people who at present have to be dealt with through the Department of Work and Pensions to make sure that there is not a complexity. However, this would now apply to all kinds of people across a very wide range of activities and income. Trying to deal with the complexity of all these measures and delaying that has got us very disturbed. It is a bad principle for legislation. It is not that there is not a role for regulation and guidance, but that essentially should just be doing the finesse on a policy that has been clarified, whether it is in primary legislation, through evidence put before Parliament or through Statements made by the Ministers.
I think we have a real concern that this is going to turn out to be absolutely unworkable. The consequences of that, both for public finances and for individual decisions made by people, probably means that this legislation will collapse at some point. We ask the Minister to go back to the department and make it clear that clarity is absolutely necessary. If there are problems here that can never be reasonably and sensibly resolved, they should be recognised at this stage.
Baroness Neville-Rolfe (Con)
My Lords, I shall speak first to the amendments in this group that stand in my name and then to those tabled by my noble friends. The noble Baroness, Lady Altmann, helpfully outlined a list of banana skins or uncertainties from her experience, such as the cost of changes in employment contracts and payroll software and of dealing with employees concerned about the change. She was right to ask whether we need to legislate so rapidly given the complexities that seem to be thrown up by today’s useful debate.
My amendments, Amendments 5 and 18, helpfully supported by the noble Baroness, Lady Altmann, chiefly concern the principle of parliamentary oversight. Nothing is more central to our work. Under Clauses 1 and 2, the Bill quite properly provides that regulations reducing the £2,000 contributions limit must be subject to the affirmative resolution procedure. That is right. If the Treasury lowers the cap, Parliament must be given the final say. What the Bill does not provide is affirmative scrutiny where the Treasury alters the methodology by which the cap is calculated or applied. That omission is significant because new subsections (6C) and (6D) do not deal with minor technical points but determine how the policy will operate in practice for thousands of earners whose pay patterns do not fit a neat monthly model.
Let us look at new subsection (6C). It permits regulations to prescribe an equivalent contributions limit for those paid weekly or at other intervals. That phrase “other intervals” is remarkably broad. It covers shift workers, contractors, seasonal workers, gig economy participants, those on irregular pay cycles and those with multiple employments. People in these forms of employment make up a large and growing segment of the modern labour market, yet the detail of how the limit will be translated for those individuals is not in the Bill. It is left entirely to regulations and consultation, as the noble Baroness, Lady Kramer, said. The annual cap is scrutinised in primary legislation, but, inconsistently, the translation of that cap into weekly, irregular or non-standard pay structures, the arrangements when an employee moves and other detail of importance to both workers and those operating payrolls, are to be set out later in regulations without the same degree of parliamentary approval. These points can be material in terms of compliance costs and fairness. In other words, those whose circumstances fit most neatly within the annual framework benefit from full parliamentary scrutiny, while those whose pay patterns are more complex do not. We submit that if the methodology by which the cap is applied to those workers is altered in a way that materially changes who pays and how much, that is a policy decision and one which requires greater scrutiny from your Lordships’ House and the other place.
The same concerns arise under new subsection (6D). There, the Treasury is given powers to determine by regulation when amounts treated as remuneration are deemed to be paid, in prescribed cases to treat a figure other than the amount foregone as remuneration and to calculate that alternative figure in such manner and on such basis as may be prescribed. These are extremely broad powers. They allow the Treasury not merely to administer the cap but to redefine how remuneration is attributed and calculated for NICs purposes. If such methodological changes can be made without returning to Parliament for affirmative approval, the House will have ceded oversight of important mechanisms that determine the real-world effect of this new policy.
My amendments simply make the point that where the method by which the contributions limit is calculated or applied is altered, Parliament should have the opportunity to approve the change. The Committee is currently scrutinising the Bill line by line. We are examining the consequences. It would be inconsistent if, once enacted, substantial changes could be introduced through regulations subject only to the negative procedure. If the Government are confident that any such changes would be technical and uncontroversial, they should have no objection to subjecting them to affirmative scrutiny.
These provisions will affect real employers and real employees. They will determine compliance burdens, payroll calculations and the effective tax treatment of pension saving. They are not trivial matters. In short, where the substance of the policy shifts, Parliament should be asked to approve that shift. I hope the Minister will recognise that this is a sound and serious constitutional point and give it proper consideration.
Amendments 4 and 17, tabled by my noble friend Lord Leigh of Hurley, make an interesting case. The Government’s policy intent, as set out in the Explanatory Notes, is to apply a national insurance change where pension contributions are made pursuant to optional remuneration arrangements—in other words, where an employee has chosen to forgo cash pay in return for an employer pension contribution. However, there are some workplace pension arrangements where no such option exists: the employee is not offered a cash alternative, there is no choice between salary and pension, and the employer contribution is simply part of the structured remuneration package.
In these circumstances, it is difficult to see how the arrangements can properly be described as optional. There is no alternative compensation available and there is no optionality. The amendment therefore makes clear that where no cash alternative is offered, the arrangement should not be treated as an optional remuneration arrangement for the purposes of the new NICs charges. I would therefore be grateful if the Minister could clarify whether arrangements with no genuine cash alternative are intended to fall within the scope of the Bill. If not, I hope he might look favourably on this clarification.
My noble friend Lord Leigh’s Amendment 33 makes a further important point that the Bill should not come into force until the Treasury has published clear guidance setting out how the contributions limit will apply in cases of multiple concurrent employments. This is a matter of basic administrative clarity and fairness. The question about two caps for two jobs came from my noble friend himself, and it would be interesting to know the answer.
My noble friend Lord Mackinlay doubts whether guidance is the right route, and wants to know what the arrangements will be today, with amendments to the Bill if we believe—in the light of the answers—that that is needed. We certainly need clarity, a change to the scrutiny of regulations to the affirmative, and perhaps guidance when we have the answers.
Finally, I turn to Amendment 4A in the name of my noble friend Lord Fuller. As drafted, the Bill introduces a flat £2,000 annual limit, above which salary sacrifice to employer pensions will attract national insurance. It is a hard cap. But real earnings do not operate in neat annual instalments; for many people, remuneration fluctuates significantly from year to year. Without any carry-forward mechanism of the kind well articulated by my noble friend Lord Mackinlay, which is apparently not very costly, the Bill creates a cliff edge. An individual who sacrifices modestly for several years but has a single high-earning year will be treated as if that year existed in isolation. That is not how pension saving works elsewhere in the tax system.
The pensions annual allowance regime already provides a three-year forward framework. Amendments 4B and 17B would align the national insurance treatment with that established precedent. The alternative amendments, Amendments 4A and 17A, simply provide the Treasury with a permissive power to introduce such a mechanism. They offer flexibility should Ministers be concerned about immediate fiscal implications.
Amendment 29A would require an independent review within 18 months of implementation. The Bill introduces a new compliance framework affecting payroll systems, remuneration design and pension planning. Therefore, it is entirely reasonable that Parliament should require evidence of its real-world impact, particularly on fluctuating earners and on employer administrative burdens. I do not agree with the noble Lord, Lord Davies of Brixton, that the extra burden of complexity on employers can be dismissed, particularly now we have heard that currently there is so little interaction between second and third employers. We want fewer burdens, not more. Enough is enough, and I look forward to a proper and detailed response on these very important technical points.
Lord Livermore (Lab)
My Lords, I am grateful to all noble Lords who have spoken in this debate. I begin by addressing Amendments 4 and 17, tabled by the noble Lord, Lord Leigh of Hurley, and the noble Baroness, Lady Altmann. These amendments relate to the technical and operational detail of the legislation, including the definition of “optional remuneration arrangements” and procedure. I fully understand the concern underlying them, which is to ensure that the Bill operates in a targeted, proportionate way and does not inadvertently affect ordinary employer pension contributions. The Government share this objective and I am grateful for this opportunity to clarify our intent.
The Bill before the Committee already relies on the established definition of “optional remuneration arrangements” set out in the Income Tax (Earnings and Pensions) Act 2003; this is the same framework that has applied since the optional remuneration arrangement rules were introduced in 2017. Under that definition, the rules apply only where an employee is given a choice—for example, a choice between receiving earnings or receiving employer pension contributions instead. This includes salary sacrifice arrangements, where an employee agrees to a lower cash salary in exchange for a pension contribution, or situations where an employee chooses pension contributions in place of a cash allowance.
Importantly, the Bill does not affect employer pension contributions where no such choice exists. Where an employer makes pension contributions as a standard part of the remuneration package and there is no alternative of cash or earnings available to the employee, those arrangements do not fall within the definition of “optional remuneration arrangements” and are, therefore, outside the scope of the Bill. In those cases, standard employer pension contributions will continue to be fully exempt from national insurance contributions, exactly as they are now. Nothing in this legislation changes that position.
Baroness Altmann (Non-Afl)
May I ask for some clarification? The Government’s intention is to try to encourage higher pension contributions. If an employer decides to increase their pension contributions, how would one know that that had not been at the expense of some salary they might otherwise have paid? Would it just never be caught? Can we safely assume that increased employer pension contributions will not be caught unless there is some official paper that says, “This was instead of salary”?
Lord Livermore (Lab)
I suppose I would ask the noble Baroness: who does she mean when she asks, “How would one know”? Who is “one” in that instance? HMRC? That would be reported to HMRC, would it not?
Baroness Altmann (Non-Afl)
As what? It would just be an increase in pension contributions because the employer has decided to increase the amount they will provide for their staff from, say, 6% to 8%. It is nothing to do with what they are paying the staff; it is not the result of negotiation. Their standard contribution was 6% and is, perhaps, going to 8%. Some people might be concerned that that would be considered by HMRC as an optional arrangement because the pensioning contribution has gone up, although that may not have been intended. The Government’s intention is, I hope, to get employer contributions to increase.
Lord Livermore (Lab)
The example given by the noble Baroness is not a salary-sacrificed pension contribution. What she is describing is exactly what you would want to happen. Surely you want the pension contribution to go from 6% to 8%.
Lord Livermore (Lab)
I do not understand where the problem is, because that is a good thing.
Baroness Altmann (Non-Afl)
The issue is that there seems to be a risk. Can we somehow—I am not quite clear how—clarify in the Bill in case HMRC might decide that that is caught by the Bill?
Lord Livermore (Lab)
I am happy to take this away and look at it, but I cannot see any way in which that would be the situation. Employers presumably increase their pension contributions all the time. That is a good public policy outcome. There is no way in which that would be caught by these regulations. I have made that extremely clear in what I am saying.
Lord Mackinlay of Richborough (Con)
My Lords, I will ask the question in a slightly different way, which may flush out what I think we are trying to get there. Say, for instance, that there is an inflationary rise by an employer every year—there always has been and, one would have expected, always will be—and, in the world post this legislation, the employer has decided not to give a salary increase, for the first time ever, but the equivalent amount has gone into an additional employer contribution to a pension. If HMRC was to come in and investigate the payroll records of that employer, would it conclude that this was a contrived arrangement that fell within this legislation, or would it just be something that the employer can do, which the Minister seems to be describing as being perfectly good and dandy?
Lord Livermore (Lab)
It is a perfectly good outcome if the employer increases their contribution into an employee’s pension. That is something we want to achieve. On specifically how HMRC would view that, I am very happy to take that away, but I do not believe in any way, in what I am saying, that that is the intention of what we are doing.
I will finish what I was saying. In those cases, standard employer pension contributions will continue to be fully exempt from national insurance contributions, exactly as they are now. Nothing in this legislation changes that position. For these reasons, the Bill already draws the correct boundary by relying on a well-established and familiar legal definition. It targets only those arrangements where an employee is given a choice between cash and pension provision, and it does not interfere with ordinary, non-optional employer pension contributions.
I turn to Amendments 5 and 18 in the name of the noble Baroness, Lady Neville-Rolfe, and supported by the noble Baroness, Lady Altmann, and the noble Lord, Lord Altrincham. These amendments relate to parliamentary scrutiny and procedure. I agree with noble Lords about the importance of maintaining strong parliamentary scrutiny, particularly where changes could affect individuals’ national insurance liabilities. That is an important principle and one that the Government share. That is why the Bill contains a series of safeguards to protect scrutiny and transparency.
The Bill explicitly provides that, where regulations are used to reduce the generosity of the £2,000 limit—that is, where changes would lower the contribution limit and thereby increase the amount of earnings subject to class 1 national insurance contributions—those regulations would be subject to the affirmative procedure. This ensures that any change which tightens the policy or increases liability is brought before Parliament for full scrutiny and approval.
By contrast, where regulations are made simply to implement the policy, to set out administrative arrangements or to increase the £2,000 limit, thereby resulting in less national insurance being payable, it is standard practice for those regulations to be subject to the negative procedure. That approach reflects the well-established distinction between substantive policy changes and regulations which deal with administration or confer additional relief.
This is not a new or novel approach. It follows the established precedent for regulations made under the existing powers in Section 4(6) and Section 4A of the Social Security Contributions and Benefits Act 1992 and the corresponding Northern Ireland legislation. In those cases, regulations of an administrative or beneficial nature have routinely been subject to the negative procedure.
I also note that the Delegated Powers and Regulatory Reform Committee has carefully scrutinised the powers in the Bill, including the proposed level of parliamentary scrutiny. The Committee has confirmed that there is nothing in the Bill that it wished to draw to the special attention of the House.
Taken together, these provisions ensure an appropriate and proportionate balance: robust parliamentary oversight where the policy is made less generous, and a well-established, efficient procedure for setting out administrative detail and making changes that operate in favour of contributors.
Baroness Neville-Rolfe (Con)
Before the Minister moves on, would he consider making an affirmative regulation on the very first occasion? The discussions that we have had this evening show that there is quite a bit of complexity here, and that has compliance costs for employers and employees. It seems odd to take the precedent of the social security Act on something new and difficult. I wonder whether that would be worth considering. Perhaps the Delegated Powers and Regulatory Reform Committee did not have the benefit of the experts here who have explained some of the problems. I am sure the Minister cannot say anything today, but could he at least have a look at whether the first such regulations could be by affirmative resolution, which is a practice that I have encountered with lots of other Bills that we probably worked on together?
Lord in Waiting/Government Whip (Lord Wilson of Sedgefield) (Lab)
Can we just let the Minister reply to that?
Lord Livermore (Lab)
I have set out very clearly which will be approached with the negative procedure and the affirmative procedure, and I do not think it is our intention to deviate from that very clear precedent.
Amendment 33, tabled by the noble Lord, Lord Leigh of Hurley, and the noble Baroness, Lady Altmann, relates to the operability of the contributions limit for those with multiple concurrent jobs. Amendments 4A, 4B, 17A, 17B and 29A, tabled by the noble Lord, Lord Fuller, also relate to operability of the contributions limit, with a focus on those with fluctuating earnings and their employers.
I fully understand the concerns that noble Lords have raised about how this measure will operate in practice, particularly for those with more complex employment arrangements and irregular patterns of remuneration. While the Bill provides the necessary powers, the full operational detail of the £2,000 cap will be set out in regulations that are yet to be published. The purpose of this two-stage process is to ensure that when the cap is introduced, it operates effectively across a wide range of real-world circumstances, including for individuals with multiple jobs, complex payroll arrangements, changing employment or fluctuating remuneration patterns over the course of a year.
Lord Mackinlay of Richborough (Con)
Is the Minister’s understanding of the Bill that the £2,000 threshold will be in the entirety of a single employee or across each employment? At the moment, with NI regulations the employee benefits from different thresholds in each employment that is held. That means that with less than £12,570 in each multiple employment no employee national insurance is paid at all. Is the intention for it to be £2,000 in total across any number of employments, or £2,000 per employment?
Lord Livermore (Lab)
That intention will be set out in the regulations once we have fully consulted relevant employers.
Lord Fuller (Con)
There is a transfer of risk, of prejudice, from the individual, who is responsible under the current arrangements, to the employer. That has not been fleshed out at all. If you have a salary sacrifice that is processed by the employer, all of a sudden that employer trespasses on the duty at the end of the tax year for the employee to put in his tax return. There has been a muddying of the water here between the employee and the employer. I know we are going to come back on Report, and I hope we will get it done in a day, but the Government should lay out their approach to this and state where the liability sits and where the penalties may be applied for honest mistakes made in that interface between the employer and the employee. That is not at all clear, and it should be.
Lord Livermore (Lab)
I am grateful to the noble Lord for his further thoughts. The carryover feature—
Baroness Kramer (LD)
I do not want to be problematic here, but I wonder whether the Minister can understand that we are looking at a very different Bill and very different implications if the £2,000 contribution limit is per individual across a range of employments, or per job, and perhaps they have three or four. It is a fundamental difference, and while the details of how things would be done in the future and the operational issues may well have to wait for regulation, guidance and consultation, it seems to me that that core issue defines this Bill, and we should know that before we complete its passage.
Lord Livermore
Obviously, I hear what the noble Baroness says.
The carryover feature of the pensions annual allowance, referenced in the justification for the amendments tabled by the noble Lord, Lord Fuller, sets the maximum amount of tax-relieved pension savings an individual can build up in a tax year without triggering a tax charge, which for most people is £60,000. The carryover feature is intended to accommodate one-off irregular spikes in pension saving or defined benefit accrual. The annual allowance carry-forward requires individuals to hold or obtain accurate records to track usage and eligibility and is not intended for day-to-day retirement planning. The Government do not consider it suitable to introduce a similar mechanism in the context of the cap on national insurance contribution-free pension saving in the Bill.
Before the detailed regulations that support the introduction of this change are finalised, HMRC will work closely with employers, payroll providers and software developers to ensure the policy operates smoothly for businesses and individuals. This engagement is not a formality. It is a necessary step to ensure that we collaboratively identify the best and most workable way to apply the £2,000 national insurance contributions-free limit, minimise administrative burdens and avoid unintended consequences, particularly for those whose earnings are spread across more than one employment.
Taking the time to engage properly and test implementation options is the best way to ensure that the policy works as intended from the outset. That is why the Government have committed sufficient time to work with stakeholders, up to and including the preparation of the important guidance for operation that the noble Lord, Lord Fuller, has raised in Amendment 29A.
On Amendment 29A, which proposes a reporting provision on the administrative cost borne by employers, I note that, upon the introduction of the Bill to Parliament, a tax information and impact note was published by the Government, setting out the impact of this policy’s operationalisation on employees and their employers. Supporting those who will implement this change within their organisations is vital, but we do not agree that that support should take the form of additional reporting requirements.
In light of all the points I have made, I respectfully ask noble Lords not to press their amendments.
Lord Leigh of Hurley (Con)
My Lords, this debate has been very helpful because it has sort of blown a hole in the Bill. The noble Baroness, Lady Altmann, summed it up rightly: what has happened is that the Government started with the answer and then tried to find the question. In other words, they were desperately looking to find £4 billion from somewhere and came up with this random salary sacrifice idea. Why salary sacrifice? Why not say that NI on pensions does not apply over X amount and limit it that way? I am afraid that the Bill just does not work.
For example, in the case I raised about a new employee where an employer is negotiating over X amount of salary or Y amount of pension, is that a salary sacrifice? The Minister could not answer that. On the £2,000 cap, the Minister could not answer. He could not answer on the collective bargaining point or whether a bonus applies. On how we deal with multiple employments, I do not think that was satisfactorily answered. I also think that the spreading point was not satisfactorily answered.
I take the point that this provision is not scheduled to come in until April 2029. I respectfully make the point that we might all be busy then on other matters but, given that the earliest is April 2029, is it not right now to pause the Bill, work constructively with us and many others who have much greater knowledge, certainly than people on this Bench, and to think through how we might find a constructive way forward? Just hoping that we might get it right in regulation is bypassing democracy. It is the purpose of the House of Lords to examine Bills, make constructive suggestions, identify and highlight holes and issues, and seek to amend them. It is fair enough that this is what the Government want to do, but they have to be clear as to how it works before the Bill goes through.
I suspect the Government will find fierce opposition to the Bill as it is on Report from a large number of people in the House, so one would hope that the Government will pause, reflect, consider and consult—on the Bill, not in regulations—to enable us to get this right. The Minister is very good at putting himself in our shoes and has done so to some extent, and I hope that he will do so again in respect of these amendments. I particularly hope that Amendment 29A comes in, so that a future Chancellor can produce a report. I beg leave to withdraw Amendment 4.
Lord Altrincham
Member’s explanatory statement
This amendment and another in the name of Baroness Neville-Rolfe would uprate the £2,000 cap by the percentage change in the consumer price index during the period before 2029-30, and would require the cap to be uprated by the same percentage as the change in the consumer price index each year thereafter in Great Britain.
Lord Altrincham (Con)
I thank the Minister for his customary courtesy in hosting our Committee and for his patience with us as we move to group 3. I will open on this group, which is on contribution limits and indexation, and comment on those after the Division.
Lord Altrincham (Con)
I thank noble Lords for their patience. I will resume the opening of group 3, on contribution limits and indexation, and will comment on Amendments 6, 13, 19 and 25 in my name and that of my noble friend Lady Neville-Rolfe. We also have a wide range of other amendments, many of which speak to the same set of concerns. I will not address the other amendments in this group in great detail, therefore, but I want to note that I am glad that the same issue has been largely echoed not only on this side of the Committee but across it.
We have already debated the principle of whether this measure is wise, but even those who are broadly sympathetic to the Government’s intentions ought to look carefully at what will happen if the £2,000 cap is left to stand unindexed year after year. The answer is that the Government will end up taxing people twice: once through the cap itself, and again through the quiet, insidious effects of inflation. The Government have chosen £2,000 as their figure. Let us take them at their word that this is intended to protect those on low and middle incomes while bearing down on very high earners; that is what the Minister has told us, in effect, and we should judge the policy against its stated purpose.
The problem is this: a cap that is not uprated in line with inflation does not stay in the same place. It moves, and in one direction only, pulling more and more people into its reach as wages and prices rise while the threshold stays frozen. We have seen this story before in our tax system. We know precisely how it ends. Fiscal drag, by any other name, is still fiscal drag, and, when it operates on a cap that limits pension saving, it is particularly harmful.
Consider an employee today contributing 5% or 6% of a salary that sits just at or above the threshold. Over three years of even modest inflation before the cap comes into force in 2029, then year after year thereafter, that same real-terms contribution will be clipped a little further each time. The worker has not become richer in any meaningful sense. They have simply been caught by a fixed line in the sand that the Government have chosen not to move. A number of different options set out in this group could mitigate this, such as raising the cap by different amounts or applying a percentage. I would like to hear from the Minister what impact these would have. For now, I believe that our amendment on uprating by CPI is the most realistic, but all have some attraction.
Given the complexities of administration already discussed—and apparently reflected in compliance costs in the years running up to the introduction of this new regressive tax—there may be a case here for providing for sensible indexation from day one. When we reformed salary sacrifice in government, we decided to continue it uncapped for pension purposes for a very good reason: we need to incentivise people to pay into their pensions to improve retirement adequacy and, indeed, to build a habit of saving. Sadly, the Bill goes in the opposite direction.
I appreciate that pensions adequacy will be debated more fully later on in our proceedings, but it is too important not to be addressed at this stage. If an increasing number of people find themselves caught by a cap as they sacrifice what are, in real terms, ever more modest sums through salary sacrifice, the inevitable consequence will be a reduction in retirement saving, affecting, as we have already discussed in Committee, people on modest earnings or, as the noble Lord, Lord Londesborough, mentioned, the cohorts over £25,000. Absent any uprating mechanism, the policy will steadily draw in those on lower and middle incomes, penalising individuals, in effect, for doing the responsible thing and saving for their retirement. As we made clear at Second Reading, improving retirement adequacy ought to be a central objective of government policy, not something undermined by it.
We must also be candid about the long-term implications. When people save less today, the shortfall does not disappear; it re-emerges later as a greater pressure on the state and, ultimately, on future taxpayers. I remain unconvinced that the Treasury has properly grappled with these behavioural and fiscal consequences, and the increasing cost of unfunded future retirement liabilities. The Government are taking significant risk with long-term savings behaviour by making even marginal changes, as was noted by my noble friend Baroness Altmann, or the expected behavioural changes by employees and employers noted by the OBR. I look forward to the contributions from other noble Lords with amendments in this group and the response from the Minister. I beg to move.
Lord de Clifford (CB)
My Lords, my Amendments 8 and 21 seek to simplify the changes to salary sacrifice and link it to NIC, which is a tax that will be applied to the pension contributions. I note my interest in the register as an employer who currently runs a salary sacrifice scheme for our auto-enrol pension scheme.
In my Second Reading speech, I talked about the attack on the middle-income employees, and this amendment seeks to make a small adjustment to those middle-income earners. I support other amendments in this group in principle, especially those trying to increase the limit. I would welcome a higher limit than the one I am proposing, but this is a practical change and will help many. I tried to create equality by increasing the NIC free limit for all employees up to a proposed limit of £50,000 to £170,000. This NIC threshold would allow them just to pay 2% on salary sacrifice pension contributions. The noble Baroness, Lady Neville-Rolfe, and my noble friend Lord Londesborough mentioned this inequity in their speeches at Second Reading, and it has also been mentioned a lot this afternoon.
As the Bill currently stands, anyone who has a salary of £40,000 or above and who is making salary sacrifice contributions of 5%, which is the auto-enrolment employee contribution, would start paying national insurance at 8% up to the national upper earnings limit—of which the current annual threshold is £50,270. At this amount, employees would then only be charged at 2% for further pension contributions. This amendment seeks to increase the limit to that figure of £50,270, thereby removing inequity for some employees paying 8% on their pension contributions and others paying only 2%—the majority being higher earners.
Another benefit of the Government linking it to the NIC threshold is that when they wish to make changes to the threshold—to freeze them or increase them, subject to fiscal requirements of the economy—it would automatically change the NIC-free contribution within salary sacrifice, meaning they do not have to make any specific changes to the limit. It would also allow the NIC non-contribution to automatically increase with some sort of link to inflation and wage growth.
It could also help with the implementation of these changes as it would simplify some of the changes for software developers, with all national insurance already set up in the programme. As we covered in the last group, the Government could treat salary sacrifice in the way NIC deductions are currently calculated—on either a weekly or monthly basis. This, however, does not cover someone with several jobs and how it will be applied to them. I look forward to the Government’s research, and possibly some clarity before Report.
A further small benefit is that it would make it easier for employees to try to calculate their take-home pay and what pension payments they can make on a monthly basis to help plan for the future. The amount this amendment would save for employees paying NIC is a maximum of about £41 a year—as the noble Lord, Lord Davies, has covered—but these small amounts, if put into savings, would grow to a large amount by retirement age. Also, small amounts will make the running of a family home better.
Employers will still pay the bulk of the NIC to be collected, with this being 15% on these types of pension contributions. The maximum charge for employers will be about £77 a year, so not of significance with regards to what is trying to be raised by this change. The Government set out that this change was to focus on higher taxpayers, and this amendment would ensure most basic taxpayers would not have to pay NIC on their salary contributions. It would also solve one of the issues mentioned in Amendment 1 tabled by the noble Baroness, Lady Neville-Rolfe.
Will the Minister say where the £2,000 NIC-free amount come from? We know it was based on independent research commission by His Majesty’s Revenue and Customs. We know that three hypothetical options were offered to employers for feedback and that the response was that, of the three options, £2,000 would have minimal impact on business. How did the researchers produce this £2,000 figure as it appears to be an arbitrary amount?
This practical amendment does not change the principle of the Bill or what the Government are trying to achieve. It closes a loophole for some who are making pension contributions without paying NIC. This change does not change the focus from removing the allowance from the target group—higher rate taxpayers and additional taxpayers—who, according to the Minister, account for about 87% of salary sacrifice contributions. The estimate of the sum raised by this change will not reduce significantly.
Finally, this change would support workers and working families in the UK, who are the target of the Government. I very much hope the Government will have a positive approach to this amendment, and I look forward to the Minister’s response.
Baroness Altmann (Non-Afl)
I will speak in support of my Amendment 9, as well as the amendments to which I have added my name, Amendments 7 and 20.
I have proposed my amendment so that—if we are to go through this exercise, which I hope we will not—no basic rate taxpayers would be likely to be caught by the measure. If the minimum contribution on which they can have national insurance relief is £10,000 a year, they are unlikely to be caught, unless they get a very large bonus. I hope that we will be able to deal with some of these issues.
The reason for suggesting a £10,000 per year pension contribution is based on the minimum amount that the very top earners are able to contribute to pensions. Under the tapered annual allowance, for example, £10,000 seems considered to be, if you like, an acceptable level of pension that is not egregious in some way.
My preference would be that, if we are to go down the route of capping the national insurance reliefs available to anyone who is paying into a pension, we do that in the way that I have just suggested, which is the same as one does with tax relief. If you pay in more than £60,000 a year, you do not get any extra tax relief; but if you pay in, for example, more than £10,000 a year, you do not get any national insurance relief on the amounts on top of that. That would be so much simpler.
I stress to the Committee that I believe that the Government and the Minister have not realised the complexity—the sheer scale of the administrative tasks—that will be involved if the Bill proceeds as it is. I liked the idea suggested by my noble friend Lord Leigh to put this on hold and do the work that we are trying to get the Government to do straight after the Bill passes before we finish and finalise the legislation, so that we have a better idea of what we are doing.
I also have a lot of sympathy with the approach that the noble Lord, Lord de Clifford, has outlined. We all seem to be trying to make the Bill operate in practice in a rather less difficult, complicated and costly administrative manner. The amendments tabled by the noble Baroness, Lady Kramer, to which I added my name, on £5,000 are just another way of trying to square this circle. I look forward to hearing the Minister’s thoughts.
I must confess that the idea of inflation linking this limit, if we were to get it, each year would probably just add to the complexity of an already incredibly complex set of changes that we are thinking of making to the Bill. We would not know, from one year to the next, what the new limit will be, because it will not be £2,000 or £10,000—I hope we will not end up there. I hope the Minister understands the spirit in which I am trying to suggest the £10,000 figure and the people I am trying to help: the basic rate taxpayers. I really do fear that they will have a much worse pension outcome if this goes ahead.
Baroness Kramer (LD)
My Lords, this is the group of amendments on which I have been the most focused. I will not repeat my Second Reading speech, in which I talked about the importance of growing pension savings to fuel the growth agenda, but the Government must realise that this policy just does not align with that. However, I hope that the Government are beginning to understand that life today is long and it is not easy to put aside enough from the working years to achieve a decent retirement without depending on the state. According to the Resolution Foundation, changes made under the Bill will hit at least half of those who use salary sacrifice, affecting a large number and a wide range of households.
Different noble Lords, as we see in the amendments here, have proposed different increases to the contributions limit. Amendments 7, 10, 11, 20, 22 and 23 are in my name, and I thank the noble Baroness, Lady Altmann, and the noble Lord, Lord Londesborough, for signing some of them. The core of my amendments would increase the contributions limit from £2,000 to £5,000, preferably with a further annual increase linked to RPI. I confess that there is not a lot of science behind my choice of £5,000, but running it past people who deal with pensions, I began to think I had hit a sweet spot with that figure. The response was that it would support people making the rather difficult choice of what to do with their money and provide a little more of an incentive to save in a pension rather than to spend.
As part of this process, my colleagues in the other place were able to obtain some research from the Commons Library, using PolicyEngine and its interactive dashboard. That work is not definitive but it provides a useful picture of the distributional effects of raising the contribution limit. An uplift of £5,000 would give the greatest gains to the two top income deciles—we would all expect that. But just a shave behind those two deciles, the next highest gainers are the second decile, which is not, I expect, the result that the Government would have predicted. This group would have within it a cohort of young people, probably in their early to mid-20s, perhaps one pay rise into their careers, still willing to live in shared accommodation and to live quite frugally, and not yet trying to pay off student loans, get a mortgage or support children. Surely this is the group that any Government should target to get into saving for a pension in a big way.
Early investment enables a pension pot to grow, but it is a narrow window. As people move into the age of families and mortgages, they cut or even stop pension savings, and women are even more affected if they reduce work to care for children. Only later in life do people return to significant savings and by then it is very late in the day. Frankly, we should make sure that they also have strong incentives to save at this point in their lives to avoid sharp drops in living standards in old age. I think the Government have looked at earners as if they belong to fixed blocks: low earners, middle earners and high earners. In reality, most people’s profiles as earners and savers change as they go through life, and the incentives therefore have to be shaped to maximise and to meet that profile.
Some of my amendments would increase the £5,000 contribution limit annually by RPI. The noble Baroness, Lady Neville-Rolfe, discussed increasing the £2,000 limit by CPI. I know that the noble Baroness, Lady Altmann, considers this an additional complication but, frankly, we have to tackle this issue of frozen thresholds, which in eras of inflation have just such a negative impact.
Lord Londesborough (CB)
My Lords, I will speak to Amendment 6, tabled by the noble Baroness, Lady Neville-Rolfe, and the noble Lord, Lord Altrincham, which I have signed, and to Amendments 7, 11, 20 and 23, tabled by the noble Baronesses, Lady Kramer and Lady Altmann, to which I have also added my name. I am broadly supportive of all the amendments in group 3, including the very practical suggestions that we have just heard from my noble friend Lord de Clifford.
I will start with the very reasonable proposal in Amendment 6 to uprate the £2,000 cap by the percentage change in the CPI. I will not get involved in CPI versus RPI, which has just been very well covered by the noble Baroness, Lady Kramer. Without one of these mechanisms, we are allowing inflation and fiscal drag, as the noble Lord, Lord Altrincham, pointed out, to diminish the real contribution value of what will be for many significantly reduced salary sacrifice. These amendments address that and I believe they are hardly controversial.
Amendment 7 in the name of the noble Baroness, Lady Kramer, is more material in terms of the numbers, changing the contribution limit from £2,000 to £5,000, but, again, it has my support. My overarching concern about this £2,000 cap is that it will compound the existential problem of inadequate pension provision in this country. I encourage the Minister, if he has not already done so, to read carefully the latest report from the Economic Affairs Committee, Preparing for an Ageing Society. On that committee, I sit with the noble Lord, Lord Davies of Brixton, although we are both about to be rotated off, and one of us possibly removed entirely from this place—but that is a separate issue.
During the inquiry, expert witnesses warned us that, despite the success of automatic enrolment, we are in a situation where we have created an awful lot of small pension pots that are hard to find, hard to keep track of and, crucially, do not add up to enough, including those pension plans deemed to be in the upper quartile. UK people currently outlive their pension savings by about eight and a half years and, of course, the gap is even greater for women. As life expectancy increases, this problem will only grow worse.
Lord Ashcombe (Con)
My Lords, the amendments in this group either increase the level of pension contributions exempt from national insurance or seek to prevent fiscal drag. Both aims are very welcome. In many respects, the higher the exempt amount, the better; on the face of it, Amendment 9, in the name of the noble Baroness, Lady Altmann, is the most attractive in that regard. Although it does not provide protection against fiscal drag, she did explain why. That said, assuming inflation remains under control, it would take many years for average contributions to reach the equivalent of £10,000, one hopes, just as it would take a fair amount of time—half, obviously—to reach the £5,000 level proposed in Amendment 7 by the noble Baroness, Lady Kramer, and others. Both would, however, offer meaningful support to average earners who receive a windfall. My noble friend Lord Leigh of Hurley addressed the issue of bonuses earlier. Those earners may wish to act prudently by making a significant one-off pension contribution, without being caught by this punitive tax charge.
The amendment in the name of the noble Lord, Lord de Clifford, offers a simple and workable approach, which he explained, yet this modest uplift would not be free of any fiscal drag, as we already know the basic tax rate on which the salary sacrifice threshold will be based. However, the amount would move if the tax bands increased—if only. I fear that, in the long term, this would work against the very employees the noble Lord seeks to protect, but it is better than the £2,000 mentioned in the Bill.
Finally, I turn to the amendments designed to counter fiscal drag, a mechanism that, as we all know, is one of the least transparent ways in which Governments of all colours raise revenue. Who does it fall upon most heavily? Once again, it is the middle and lower earners of this country: the teachers, nurses, engineers and shop owners—the list goes on—the people on whom the nation depends. Yet the Bill risks penalising them for doing exactly what we encourage: saving responsibly for a decent pension in retirement. The amendments in the names of my noble friends Lady Neville-Rolfe and Lord Altrincham anchor the thresholds to the consumer prices index, while those in the names of the noble Baroness, Lady Kramer, and the noble Lord, Lord Londesborough, use the retail prices index, and we have just heard why.
However, taken together, this group of amendments is of real importance and I support them all, to a greater or lesser extent. We have to try to move this absurdly low number. Each of them, in different ways, seeks to protect the middle and low earners who are trying to do the right thing and save for their futures.
Lord Mackinlay of Richborough (Con)
My Lords, I support a number of the amendments within this group. Obviously, the one that catches my eye the most is the one in the name of the noble Baroness, Lady Altmann, which proposes the highest increase to £10,000. But I am very reluctant that we put into legislation more figures that become fixed and then become fiscal drag in future.
I write a regular column in the Money section of the Daily Telegraph—I am not sure it is declarable for this particularly, but it is on issues of tax. I wrote an article just a couple of weeks ago on inheritance tax. The threshold has been fixed at £325,000 since 2009, and I say with no great enthusiasm that we had 14 years of government, from 2010 to 2024, where we did not increase that. The Government with the blue flavour have not been good at increasing and uprating thresholds in line with inflation.
As has been said quite widely, it becomes the quiet hand that just increases more money to the Treasury in a fairly underhand way, you could say, because the Government have done nothing new: they have simply sat with the legislation that they have and, lo and behold, the magic of inflation cuts in and more money is raised from the same tax. If the 2009 threshold of £325,000 for IHT had been uprated to today, it would now represent £569,000, reflecting that in parts of the country, a house at £325,000 in 2009, which was intentionally free of inheritance tax, is not free of inheritance tax today. With this legislation, we are potentially implementing a fixed £2,000, which, with fiscal drag and inflated or inflating wages over time, will drag more and more people into the net.
The Financial Secretary to the Treasury has said in glowing terms during the course of this debate how good pensions are. I have no doubt that everyone in the Room thinks that pensions are a good thing. Unfortunately, it seems that that good thing is being whittled away. It does not take much for people to change their behaviour. I am concerned that the £2,000 threshold will mean those on the edge will only ever make a £2,000 salary sacrifice. They will not, under any circumstances, particularly if they are a basic rate taxpayer, ever go to £2,001—with an additional pound —or beyond. They will simply have smaller pension pots, as was very adequately described by the noble Lord, Lord Londesborough, in his good contribution.
There is the magic of compounding—I believe that Einstein even called it the eighth wonder of the world. It is the magic by which, just with plain inflation, £1 is put away in a very dull, FTSE-based equity plan—or even, should one wish, into government gilts over a very long period—and it goes up. By receiving just 4% or 5% of interest per year, those small pounds from years ago become very big pounds by the time one comes to retirement. As the noble Lord, Lord Londesborough, very ably said, people have small pots. Even with the great success of auto-enrolment, those pots still remain pretty small; they are not quite enough to supplement a long retirement as people live longer.
I support the good things that the Minister said about pensions. There always seems to be a bit of a cover from a Government who say “Well, only 26% of people will be caught”—I think the Minister said 74% of basic rate taxpayers will not be caught—as if that 74% is more than half and so we need not worry. I am afraid that I do worry about the 26% who will be caught and may do different things—namely, they will not put money away for their savings. For administrative ease, I think the higher the better, so that we do not implement into our tax and national insurance legislation yet another fiscal drag that gets worse and worse over time.
The plea repeated by many in Committee today is to pause and wait, because this will not come in until 2029. Our wide-ranging debate has highlighted a lot of flaws and problems. One of the big flaws seems to be that the Minister who has drafted this legislation remains a little unclear, dare I say it, whether this applies per person or per employment. That seems to go somewhat to the heart of what we are debating. I would almost suggest that we draw stumps and come back another day when the Minister is clear on that, after having asked somebody—I suppose someone in HM Treasury—what is intended. Is it £2,000 per person or per employment?
On the basis of that ambiguity, however, I recommend that we have an uprating to £10,000 at the highest level. Given all the uprating measures that noble Lords have described today—whether an inflationary index is applied or a flat £5,000 becomes the new base level, as the noble Baroness, Lady Kramer, proposed—I am afraid that the £2,000 threshold is looking very threadbare. It drags far too many basic rate taxpayers—the normal end of taxpayers—into its potential net. The danger is that they will not save and will not grow their own pots into the future. People on low pension income in the future will become reliant on the state.
What we are doing here is trying to get a bit of sugar today into the Treasury coffers. A sugar rush, where the future will have to be paid for as more people fall into pension credit and other forms of retirement benefit payments, could so easily be avoided by introducing every measure we possibly can, here and now, to get people saving for their own future.
Lord Leigh of Hurley (Con)
My Lords, it is worth reminding ourselves that this legislation was prompted by a document published in May last year with this eye-catching title: Understanding the Attitudes and Behaviours of Employers Towards Salary Sacrifice for Pensions. It concluded:
“All the hypothetical scenarios explored in this research”,
including the £2,000 cap, were “viewed negatively” by those interviewed. It said that the changes would cause confusion, reduce benefits for employees and disincentivise saving for a pension. The report came to the conclusion that, of the three proposed hypothetical options for change, the £2,000 cap was no more than the least bad option.
As has been discussed here, even the OBR has stated that, in the first year in which this measure bites, there will be an estimated revenue of £4.48 billion from the Bill, but it will drop in the next year to £2.6 billion. That is a massive fall in revenue. Should HM Treasury not be worried about this? Should it not be asking itself, “How can we bring in something that leads to a drop in revenue of 50% in year 1?”? The taxpayer wants to know. Could an assessment be done of whether this is likely to be the case in some of the scenarios set out in these amendments—in particular, the £5,000 and the £10,000? I do not know this, because I do not have the resources to do that, but I suspect that, although bringing the cap in at £5,000 and £10,000 would not lead to the £4.48 billion in year 1, it would lead to a much more consistent figure in the subsequent years, for the long-term benefit of the country. As my noble friend Lord Mackinlay said, it will be a bit of a sugar rush and will force people to make most unfortunate changes in their patterns of savings, which the Government cannot be keen to see happen.
Lord Livermore (Lab)
My Lords, I am grateful to noble Lords who have spoken in this debate.
First, I will address Amendments 6, 10, 11, 13, 19, 22, 23 and 25 in the names of by the noble Baronesses, Lady Neville-Rolfe and Lady Kramer, and the noble Lords, Lord Altrincham and Lord Londesborough. These amendments seek to uprate the cap by the percentage change in the consumer prices index or the retail prices index. The Government agree on the need to keep the level of the cap under review to ensure that it continues to meet its policy objective: keeping the cost of salary sacrifice tax reliefs on a fiscally sustainable footing while protecting ordinary workers. However, we disagree with the approach set out in these amendments because it would be inconsistent with the approach taken in respect of other pension tax reliefs, which are not routinely indexed with inflation.
For example, in 2023, when the previous Government made changes to the annual allowance, they increased it by a set amount rather than indexing it; the annual allowance was otherwise not routinely uprated or index-linked. The Government are taking a pragmatic, balanced approach to ensuring that the cost of tax relief on salary sacrifice pension contributions remains fiscally sustainable. The future level of the cap in the next decade and beyond is for future Budgets in those decades.
This leads me on to Amendments 7 to 9, 20 and 21 in the names of the noble Baronesses, Lady Neville-Rolfe, Lady Kramer and Lady Altmann, and the noble Lords, Lord de Clifford and Lord Londesborough. These amendments seek to increase the cap beyond £2,000. It is important to consider the level of the cap in the wider context of the objectives of this change, which are about keeping the tax system on a sustainable footing while protecting ordinary workers. Without reform, the cost of this tax relief is now set to almost treble in cost, from £2.8 billion to £8 billion, with the vast majority of the benefit going to higher earners because around 62% of salary sacrifice contributions come from the top 20% of earners. Although some tax experts have called for pension salary sacrifice to be abolished entirely, the Government are taking a more measured and pragmatic approach.
As I said earlier this afternoon, the £2,000 cap protects 74% of basic rate taxpayers using salary sacrifice. This means that three-quarters of those earning up to £50,270 a year who use salary sacrifice will be protected by the cap. Almost all—95%—of those earning £30,000 or less who use salary sacrifice will be entirely unaffected by the changes. Some 87% of salary sacrifice contributions above the cap are forecast to be made by higher and additional rate taxpayers. Increasing the level of the cap in the way proposed by these amendments would cost additional money and would undermine the objective of putting this tax relief on a sustainable footing for the future. Such changes should also be considered in the wider context of pension tax relief, which amounts to more than £70 billion each year; that spend will be entirely unaffected by this legislation.
In the light of the points I have made, I respectfully ask noble Lords to withdraw or not press their amendments.
Lord Altrincham (Con)
My Lords, as many noble Lords have made clear in their remarks on this group, the policy as currently drafted operates as a rather untargeted tax. Introducing indexation by RPI or CPI—described by the noble Baroness, Lady Kramer, as the goose and gander amendment—would be a straightforward and proportionate step that the Government could take now to mitigate what I can only assume is an unintended consequence. We on these Benches would also support the higher limits proposed by noble Lords and noble Baronesses today to mitigate behavioural changes that may undermine the objectives of this initiative or the Bill entirely.
The Minister has heard a range of constructive proposals this afternoon as to how this issue might be addressed. I very much hope he has listened carefully to the strength of feeling across the Committee and that he will give serious consideration to adopting one of these solutions. I beg to withdraw the amendment.
Baroness Neville-Rolfe
“(5) The amendments made by this section do not apply where the employer—(a) is a small or medium-sized enterprise, or(b) is a charity or social enterprise which meets the conditions in subsection (6).(6) The conditions are that—(a) the employer meets the definition of a small or medium-sized enterprise in section 465 of the Companies Act 2006, and(b) the employment is carried out wholly or mainly for the purposes of that charity or social enterprise.(7) In this section—“charity” has the meaning given by section 1 of the Charities Act 2011;“social enterprise” means an undertaking which—(a) has as its primary purpose the achievement of social or environmental objectives, and(b) principally reinvests its profits for those purposes;“small or medium-sized enterprise” has the meaning given by section 465 of the Companies Act 2006.”Member’s explanatory statement
This amendment exempts small and medium-sized enterprises, and small and medium-sized charities and social enterprises, from the provisions of the Bill in Great Britain.
Baroness Neville-Rolfe (Con)
My Lords, I will speak first to Amendments 12 and 24, which would exempt small and medium-sized enterprises, charities and social enterprises from the salary sacrifice pension contribution cap introduced by the Bill. I also welcome Amendment 27, tabled by the noble Baroness, Lady Kramer, requiring a review of the ability of SMEs to recruit and retain staff.
Small and medium enterprises have been hammered under this Government. They have introduced policies that will cost businesses £25 billion annually in tax compliance alone, according to the firm Together Accounting. Their previous NICs hike added a further £25 billion burden and there are business rate hikes, minimum wage increases and the Employment Rights Act. Is it any wonder that 52 businesses per 10,000 are entering insolvency, nearly double the rate from just five years ago? The Federation of Small Businesses reports that 63% of businesses now cite tax as their primary concern. Business confidence has plummeted. This is something that I have spoken about many times, and the Conservative Party stands with small businesses. They are the lifeblood of our communities, our jobs market and our economy.
Our amendment tries to shield SMEs and charities from what is effectively yet another damaging tax by exempting them from this policy. Given the onslaught SMEs have suffered under the Government, the rationale for this needs little explanation. SMEs operate on thin margins, often without sophisticated accounting mechanisms or payroll and accounting teams. They will be disproportionately affected by this policy and should be exempt.
Turning to charities, before the Budget was even confirmed, the Charity Finance Group ran a survey of the sector specifically on the question of salary sacrifice. It found, and I urge the Committee to note these figures carefully, that 81% of charities reported that the salary sacrifice change would have a negative impact on their ability to offer competitive benefits to staff. Nearly seven in 10 had already started to reduce headcount or expected to do so in the near future, and that was before this further measure. It is not surprising that they are worried, as in my experience charities often have more complex employment arrangements: seasonal working, moving jobs, and weekly rather than monthly pay. They also often have much less sophisticated payroll systems.
CFG warned explicitly that, for charities operating on tight margins, salary sacrifice has been a critical tool and a way both to support staff and to achieve meaningful savings on employer national insurance at the same time, stretching limited resources further while enabling employees to build better pension provision. To cap that mechanism is to remove one of the few cost-efficient tools available to organisations that cannot increase prices, raise equity finance or easily diversify their income when grant funding or public contracts do not keep pace with costs.
The wider context of what has happened to charities under the Bill matters here, too. Last year, on Report, the House of Lords carried amendments to the then national insurance contributions Bill that would have protected small charities with revenues under £1 million from the main NICs rise. However, the Government rejected them, and we have seen what happened there. The Government have said that they want to build a stronger economy and a thriving civil society. That ambition is not well served by a policy that removes from smaller employers and civil society organisations one of the most effective tools that they have to compete for talent and support their people in saving for retirement.
Amendment 26 asks that, within 12 months of this Act coming into force, the Government commission and lay before Parliament an independent review of its impact on small and medium-sized enterprises, including administrative costs, compliance burdens, employment costs and the ability of SMEs to attract and retain staff—and, crucially, that this be assessed in the context of the cumulative changes to employer national insurance since July 2024.
Time and again, the Government’s approach has displayed a worrying lack of understanding of how small firms actually operate, how thin their margins are, how sensitive they are to cumulative costs and how easily confidence can be shaken. We saw it with the previous national insurance hike and in the rushed recalibration over pubs, and we see it all over again in this Bill and the rush to pass it when the vital detail is still to be settled. We know that the revenue collected will almost halve in the second year of implementation, so there will be lots of new compliance costs and an uncertain future.
If the Government are confident that this measure will not materially damage SMEs, they should welcome the opportunity to demonstrate that through an independent review. If they are serious about growth, entrepreneurship and avoiding further damaging U-turns, they should look at the cumulative picture. Given the scale of pessimism now facing the small business community and the stakes for employment and growth, I urge the Government to accept this amendment. SMEs do not trust the Government to act in their interests. If the Treasury were to adopt such an amendment—as well as the associated one for Northern Ireland, where there are so many SMEs—perhaps this trust might start to be rebuilt. I beg to move.
Baroness Altmann (Non-Afl)
My Lords, I have added my name to all of the amendments in this group. Again, I think that they are very important. I am pleased to have added my support for my noble friends Lady Neville-Rolfe, Lord Altrincham and Lady Kramer—if I may call her my noble friend—as well as for the noble Lords, Lord de Clifford and Lord Londesborough. All of them are picking up on the huge risks that are being posed in terms of additional administrative costs, burdens and complexity for small and medium-sized businesses, charities and social enterprises, which, as my noble friend Lady Neville-Rolfe explained, have already had so many extra burdens placed on them.
I reiterate that I hope that the Minister will recognise that we need this analysis and this type of work before we make the primary legislation that we are considering here, rather than afterwards. I also hope that, if the Minister does not have ready answers, modelling or analysis that would address the issues these amendments are trying to understand in more detail, we can, as we have heard before in Committee, put some of this on hold until we have a better understanding of what the real-world impacts will be.
Lord Londesborough (CB)
My Lords, I will speak to Amendments 12 and 26, tabled by the noble Baroness, Lady Neville-Rolfe, and the noble Lord, Lord Altrincham, to which I have added my name. I am also supportive of Amendment 27 in the name of the noble Baroness, Lady Kramer, to which I should have added my name; I apologise for not doing so.
I spoke in the previous group about pension inadequacy. This is especially true for employees in our start-ups, scale-ups and SMEs in general. So the exemptions proposed in Amendment 12 get my full support. I should declare my interests as a chairman, investor and adviser to a range of start-ups and scale-ups.
There is an element of Groundhog Day here: some noble Lords will remember that I tabled a similar exemption on behalf of SMEs in last year’s NICs Bill. With the invaluable support of the noble Baronesses, Lady Neville-Rolfe and Lady Kramer, we achieved a majority of about 100 on Report. At that point, we issued some fairly blunt warnings in relation to jobs; I am afraid that those warnings have been borne out by the employment figures, especially at entry level and in part-time roles among SMEs. These same employers, who are struggling both to create new jobs—look at the vacancy numbers—and to sustain existing ones, face yet more complications and costs in the area of national insurance contributions. Increased burdens at a time when we desperately need to generate per capita economic growth are not well timed.
Some noble Lords will have read the recent letter a couple of weeks ago from the FSB—the Federation of Small Businesses—to the Chancellor of Exchequer. It made for particularly grim reading. More than a third—I emphasise that—of employers among SMEs plan either to shut down their companies or to reduce output due to higher employment costs, increased business rates and increased energy costs. If we want to protect our vital SME ecosystem, we need to stop punishing them—I say “punishing” because it is appropriate, as these are punitive measures—and complicating their business of employment.
In the light of what I have just said, there is a clear need for a review of the impact of the Bill on SMEs, as is outlined in Amendment 26, which also gets my full support.
Lord Ashcombe (Con)
My Lords, I support the amendments in this group in the names of my noble friend Lady Neville-Rolfe, the noble Baroness, Lady Kramer, and others—in fact, quite frankly, most of the noble Lords currently in Committee.
These amendments speak directly to the reality facing SMEs and charities, which are organisations that form the backbone of our economy and social fabric. These employers have already endured a succession of rising costs—I have a few to add, so I will go through them again—such as higher national insurance, changes to inheritance tax, increases in the minimum wage, new obligations under the Employment Rights Act, business rate adjustments and the continuing shock of energy prices. A handful of sectors have received modest relief but, for most, these pressures fall straight to the bottom line. The cumulative effect is profound.
Charities are no better placed. They are all under extraordinary strain, yet they provide services that the state itself cannot easily replace. How do these organisations continue to operate if further costs are piled on them? My noble friend mentioned the outrageously appalling numbers.
There is even more concern when donors are typically being more hesitant, due to the overall sentiment in the country to donate. This is not merely short-sighted; it risks creating far greater financial and social pressures for future Governments. The Bill adds yet another cost: it raises employment expenses at a time when many organisations are already stretched to breaking point. It undermines their ability to offer competitive pension packages, often one of the few tools available to attract and retain skilled staff. There is a high chance that these businesses will simply withdraw salary sacrifice schemes and may simply withdraw themselves from the market.
Implementation is scheduled for 2029, which gives these operations time to review the situation, which is, as we have heard, very complex. Many SMEs do not have HR teams to manage new thresholds, payroll changes or contract revisions. They will be forced to pay for external support that they can scarcely afford in the current climate. This is not a policy that encourages growth; it is one that diverts time, money and energy away from the very activities that drive economic vitality. This is on the basis of companies that employ on an annual basis, but what happens if they take on shift and seasonal workers who may have more than one occupation, which we have already heard quite a lot about? The complexity merely increases ever more, as does the expense, if the company is prepared to continue with salary sacrifice schemes at all.
Lord de Clifford (CB)
I have had the privilege of putting my name to Amendment 27 in the name of the noble Baroness, Lady Kramer; the noble Baroness, Lady Altmann, has added her name to it as well.
I own an SME business, and this Government’s changes to NIC have significantly affected it. Of the 8% rise in salary costs to my business in the past 12 months, 25% of that figure—or 2%—was the NIC change. The changes proposed would increase that further.
This amendment seeks a review of the effect of the change on SME businesses and on employment rates within SMEs. SMEs are the bedrock of employment in this country, as was covered by my noble friend Lord Londsborough. The addition of this pre-profit tax does nothing to encourage growth, investment or employment. This review is very much welcome to identify any changes within SME businesses, to ensure that we remain healthy and can create opportunities for growth and jobs for all generations, especially the young.
Lord Mackinlay of Richborough (Con)
My Lords, I normally do not support measures that carve out certain sectors from others in the normal weft and weave of enterprises in the country, but I support this one, particularly Amendments 12 and 24 which seek to carve out small and medium-sized companies under the Companies Act 2006 and charities and social enterprises. I think a tipping point has now been reached, particularly on the back of the Employment Rights Act, increased national insurance and higher minimum wages, particularly those applying to younger employees.
We are seeing that already with the highest rate of NEETs—younger people out of work—than I think we have ever seen before: 700,000 at present. What always happens under a Labour Government is certainly happening. It usually happens over a longer period—over the full five years of a Labour Administration—but it is happening very quickly within their first 18 months. Levels of unemployment are higher than we have seen. We now have higher rates of youth unemployment than the EU average. In days of old, we used to point our fingers over the channel, laugh at the level of youth unemployment over there and wondered how on earth they got it so wrong—but no more. The finger-pointing is now coming from that side of the channel to us, wondering how we could be so stupid so quickly. I think that tipping point has been reached.
A reality for small and medium-sized enterprises, particularly the smaller ones, is that they do not run their own payrolls; they contract out their payroll requirements to payroll bureaus. It is very commonplace. I would say the tipping point could be even up to 50 employees, where the company will pay a bureau to do all the complicated stuff—processing the real-time information, taking in the coding notices, working out the statutory sick pay—that comes with running a payroll. Smaller and medium sized enterprises want to get on with the business they do. Whatever the business might be—whether a retailer, a pub, a printing company or whatever—it does not particularly want to add to the administrative burden internally and deal with the cost of it, so they tend to outsource it.
My thoughts on these amendments might be a little different if we knew—and I will say it for a third time today—whether this £2,000 threshold measure applied for the employee across all their employments or across each employment. If it does apply to the employee across multiple employments, then the payroll bureau way of doing things becomes extremely complex. It will have an additional burden to speak to the payroll bureau and the tax office for the details of the employee’s other employments. Until we have an understanding of what that really means within this legislation, I think we are a little bit out at sea.
However, there are other things going on in the employment market at the moment. We have one sector that is growing quite well in terms of the employment numbers and the number of new employees: the public sector. It is about the only sector that is growing, and of course it does not really do much for the GDP of the nation because every penny has to come on the back of proper profits and taxes that are derived from the private sector.
As someone who was once involved in the SME sector, I know that there is often a competition going on between a potential employment available to a good and skilled potential employee in the market. They have the choice of going to the public sector, which gives six months of paid illness leave and another six months of half pay—there are not too many questions asked. There is lots of working from home and lots of other lovely benefits—such as an accumulating index-linked pension—which few in the private sector can match anymore. The days of the final salary pension really only exist in one place, and that is now in the public sector. Therefore, the SME sector has a struggle to recruit, especially when the market is good.
A skilled employee, when given the choice of working in the public sector with all those benefits or working in the private sector—where the pension, sickness benefits and holiday benefits are not so good, and the requirement to worked damned hard is different in expectation—will choose the public sector. There is a conflict going on in employment. The one thing that small businesses might be able to offer, however, is a better pension provision, and these measures will stop that. It is the one thing they can use to attract a good employee. To deprive the small business sector, charities and those in social enterprises of the opportunity to offer a little bit of gold plate in the employment offer to a very good employee is a very backward step.
For perhaps one of the first times, I actually support these amendments because employment rights and running payrolls have become so complex, and there are more and more burdens for businesses, which are negatively impacting them. A carve-out for smaller enterprises under the measures proposed by Amendments 12 and 24 are to be supported because the backs of small and medium-sized enterprises are breaking, and they need support that, I am afraid, this legislation does not provide them.
Baroness Kramer (LD)
My Lords, as we discussed at Second Reading, the Federation of Small Businesses has warned that the impact of the Bill could meaningfully disadvantage small businesses. In a way, I look at social enterprises and charities as, essentially, a subset of the SME sector. Big businesses can often devise ways and perks to reward people that are simply not available to SMEs, so they can dampen the impact of the Bill on their workforces and widen that competitive gap.
As a consequence of that, I thank the noble Lord, Lord de Clifford, for signing Amendment 27 in my name, and the noble Lord, Lord Londesborough, for saying that he would have signed it. Frankly, when these noble Lords give warnings on what will happen and what is happening in the small business sector, I really hope that the Government are listening because, unfortunately for our economy, their track record has a real history of being correct, and those warnings need to be taken seriously.
As other noble Lords have said, SMEs are already under pressure. I am not going to repeat the saga of the burdens on them, but we have to recognise that this is a time when we absolutely need small businesses to accelerate their hiring, especially of young people, and make serious investment in productivity and growth. Once again, this is another measure where I can see no alignment between the Bill and the Government’s industrial strategy or growth policy. It seems to pull in completely the wrong direction.
Amendments 12 and 24 would straightforwardly exempt SMEs. Amendment 27 in my name would give the Government a chance to make their case, in a sense, because it would require a detailed review within 12 months of the Act being signed, which is obviously long before the Act will come into force. The review would target the two issues that we have said are so critical—SME recruitment and retention—and would also look at this matter in the context of the cumulative impact, particularly of NICs changes since this is a NICs Bill. It seems wise to encompass a look at these two NICs changes as being linked and entangled in the way they impact on small businesses.
I do not want to take up much more of the Committee’s time, but it is important to stress that this is not the time for uninformed decision-making; that has been echoed through group after group of amendments. I am not rejecting the other amendments but Amendment 27 would be a relatively modest way for the Government at least to do something that begins to put evidence before Ministers and Parliament.
Lord Livermore (Lab)
My Lords, I am grateful to all noble Lords who have spoken in this debate. First, I will address Amendments 18 and 24 in the names of the noble Baronesses, Lady Neville-Rolfe and Lady Altmann, and the noble Lord, Lord Altrincham, which would exempt small and medium-sized enterprises, charities and social enterprises from the Bill.
The Government agree on the importance of supporting small businesses and ensuring that they are not unduly impacted by these changes. Small and medium-sized enterprises are far less likely to offer pension salary sacrifice than larger businesses. According to Nest Insight, around 33% of small businesses offer pension salary sacrifice to their employees, compared with 83% of large businesses. In addition, employees of small and medium-sized enterprises are far less likely to have contributions exceeding the £2,000 cap; only 10% of employees in SMEs have pension contributions through salary sacrifice exceeding the cap. Exempting small and medium-sized enterprises in the way suggested by the amendment would therefore introduce significant additional complexity into the tax system and would be disproportionate given the limited impact that this policy is expected to have on these businesses. The Government are engaging with employers and other industry stakeholders ahead of these changes coming in.
Similarly, Amendments 26 and 27 in the names of the noble Baronesses, Lady Neville-Rolfe and Lady Kramer, and the noble Lords, Lord Altrincham, Lord Londesborough and Lord de Clifford, would require a review of the impact of the Act on small and medium-sized enterprises. As I have already said, the Government agree about the importance of supporting small businesses. The changes in the Bill will mainly impact larger employers, which are much more likely to use salary sacrifice and to have employees who are contributing above the £2,000 cap.
More widely, the Government are delivering the most comprehensive package of support for small and medium-sized businesses in a generation through the small business strategy, unlocking billions of pounds in finance to support businesses to invest and removing unnecessary red tape. Ahead of the cap coming into operation, the Government will continue to work closely with employers, payroll administrators and other stakeholders to ensure that the changes are implemented in the least burdensome way for businesses of all sizes currently using salary sacrifice.
In the light of the points I have made, I respectfully ask noble Lords to withdraw or not press their amendments.
Baroness Neville-Rolfe (Con)
My Lords, if the Government truly wish to support SMEs and charities, they should not press ahead with a measure that those enterprises have told us—I gave a great deal of evidence, and we have heard this from others as well—will damage them, increase their operating costs and complexity and reduce their ability to offer options to their employees. The noble Baroness, Lady Altmann, put the case well.
The noble Lord, Lord Londesborough, with his unique experience of SME businesses, reminded us of the dire situation facing SMEs, with significant numbers closing down, as one can see on almost any high street. My noble friend Lord Ashcombe emphasised the cumulative effect and rightly added energy prices to the problems that SMEs and charities are facing. The Bill will raise employment costs at a time when companies are already stretched to boiling point.
The noble Lord, Lord de Clifford, illustrated the problem with information drawn from the impact of NICs on his business, which I found particularly compelling. He is very keen to have the hope—I think that is the right word—that will arise from the proposed review. My noble friend Lord Mackinlay reminded us of the large number of NEETs who are out of work, as well as of how we now have higher youth unemployment than the EU, generating what he referred to as a tipping point.
My noble friend rightly raised—I hope that the Minister will come back on this—the key unanswered question of whether the £2,000 cap will apply per employee across multiple employments. We must have an answer on that because it will make a great deal of difference, especially to smaller operations. I am impressed by the fact that, for the first time, my noble friend has agreed to support a carve-out for SMEs and charities, on which I have campaigned for the past 11 years.
The Minister and I have often exchanged views on SMEs, but this is an opportunity for him to make a concrete change to the Government’s policy on this matter, do something to show that the Government listen to SMEs and small social enterprises and provide them with a bit of relief from the mountain of complexities piled on them. I urge the Government to think again and make a positive change to the Bill in this area. It would not be expensive, but it would protect jobs and businesses, help our economy and, above all, reduce compliance costs for both this vital sector and the officials who are taxed with policing the changes and gathering revenue.
Lastly, I reiterate my support for the review of SME recruitment and retention proposed by the noble Baroness, Lady Kramer, in the light of the cumulative NICs changes that we have seen over the past 18 months. Like her, I hope that the Government are listening. For now, I beg leave to withdraw the amendment, but we will, I think, want to revert to the position of SMEs and charities when we come back on Report later in the spring.
Baroness Kramer
“Calculation and publication of lifetime pension values(1) The Secretary of State must calculate and publish illustrative projections of the lifetime value of pension savings before and after the changes made by this Act.(2) For the purposes of this section, “lifetime value” means the total pension income an individual is expected to receive over their lifetime.(3) Projections must—(a) be based on clearly stated assumptions, and(b) include examples covering a range of income levels and pension entitlements.”Member’s explanatory statement
This amendment seeks to require the publication of illustrative lifetime pension outcomes.
Baroness Kramer (LD)
My Lords, I will try to be speedy. The amendments in this group in various ways would require that the work to assess the impact of the Bill on pension savings and pension incomes is done and put before Parliament. My Amendment 28 would make this a responsibility of the Government. Amendments 29 and 30 in the names of the noble Baronesses, Lady Altmann and Lady Neville-Rolfe, would require an independent review. These three amendments have different degrees of detail and emphasis, but I suspect they can easily be redrafted to cover all the key elements.
It seems to me that behind all these amendments sits a basic question: did the Government do their homework? If they had, they could pretty much hand us everything we have requested tomorrow morning. I fear that this has been another off-the-hoof policy where the Government poorly understand the consequences, and I think that needs to be exposed and dealt with. It is true that implementation of the policy is not until 2029, probably the other side of another general election, but, frankly, that is not an excuse for doing this wrong, for not having the evidence and for not making it available. That is what I think every amendment in this group seeks to achieve in a different way. I beg to move.
Lord Altrincham (Con)
My Lords, Amendment 30 has a simple purpose: to ensure that before the Act is commenced there is an independent review of its impact on pensions adequacy—which we have been talking about again and again through this Committee—saving behaviour and on those repaying student loans, and that Parliament must see the findings before the provisions take effect.
Pensions adequacy is one of the central long-term economic challenges facing this country, and under the Government it is set to get far worse. The Institute for Fiscal Studies’ report Adequacy of Future Retirement Incomes: New Evidence for Private Sector Employees could not be clearer. On current trends, around four in 10 private sector employees saving into defined contribution schemes are projected to undershoot the Pension Commission’s replacement rate targets. Even using a far more modest minimum living standard benchmark, a substantial minority are not on track to reach it.
The IFS also makes a crucial point that, since the Pensions Commission report 20 years ago, lower returns on saving and longer life expectancy mean that the savings rates required to hit adequacy benchmarks are higher than previously thought. In other words, the adequacy challenge has intensified, not diminished. Yet what are the Government doing in the Bill? They are altering one of the key mechanisms through which many working people build their retirement savings without any independent assessment of what that will mean for adequacy.
Baroness Altmann (Non-Afl)
My Lords, this group of amendments is, once again, trying to do the work that needed to be done before we had this Bill. All the proposals are important, in my view. Mine is a version of what we need to find out. I genuinely believe that this needs to be done independently of government because there are so many elements that government may not or seems not to have considered.
Effectively, this is another tax increase. At the margin, it can only make pension provision worse. It cannot improve it at a time when we are supposed to be trying to help people have better pensions going forward. It can only, at the margin, as I say, deter employers and employees at the current levels of provision and encourage reduction.
The Society of Pension Professionals has pointed out that 290,000 employers are using salary sacrifice in this country at the moment. We know that there is an expected saving in 2029-30 of £4.8 billion and a further saving of £2.6 billion in 2030-31, but even with those figures, the OBR points out that the revenue raised is subject to uncertainties related to the potential responses to the change. We have heard an awful lot about the potential responses to the change today and it is inevitable that, although the Prime Minister stressed in March 2025 the Government’s commitment to reduce employers’ compliance costs by 25%, this Bill alone will significantly increase the cost for those employers who have been using salary sacrifice as a way of helping their employees have a better pension outcome.
Pensions administration is already a problem that has been swept under the carpet for far too long. We know that the pension rules are ridiculously complicated and that data errors abound. If we continue to have these ongoing changes or salami-slicing of the tax advantages that pensions have, rather than one holistic review of how we provide pensions and incentivise both individuals and employers to provide for themselves in later life, then we will never end up with the kind of system we need. We will continue to add complexity to an already extraordinarily complex system.
I hope that my suggestion of a review, which would include what this Bill would do to the use of salary sacrifice as a whole by employers, will again signal to the Government what the likelihood seems to be. Given that the Bill already foreshadows future changes, employers who are currently running salary sacrifice will start to realise just how complicated it will be to adapt to the measures of this Bill. They will then think, “Are we going to have to go through this all again if the limit changes or if some other change happens? We’ll just abandon the idea of salary sacrifice altogether, and perhaps those who are already contributing more than the minimum will cut back to the minimum”. We need to be very mindful of this kind of change and whether we can have a holistic overall view of pension provision in the private sector, in particular, and the way in which we incentivise employers and employees.
Lord de Clifford (CB)
My Lords, I added my name to Amendment 29 in the name of the noble Baroness, Lady Altmann. She has just summed up a lot of my issues, so I will keep this brief because it is late.
I will come from the perspective of one limited experience: my business. The success of auto-enrolment is fantastic, and the salary sacrifice scheme has really helped. I have 18 and 19 year-olds saving for a pension; it is only small amounts, but it really helps them. The other thing is that those who are slightly better paid find it so easy to increase their pension contributions and then pull them down again when they need their funds. I believe this Bill will be a disincentive to those people who are trying to save a bit more.
Therefore, I support this amendment, which seeks to check that we do not lose the advantages that auto-enrolment has brought to SMEs and has forced employers like me—I think back when we instigated ours—to bring in pension schemes. There is real value to that. The experience of the noble Baroness, Lady Altmann, in pensions is a lot greater than mine, so I welcome a review, especially an independent one. It is so important that we start saving for our pensions. My noble friend Lord Londesborough came up with some statistics earlier and the report from his committee is important.
Those are the reasons why I support this amendment. It is essential that we continue to review how people save for their pensions.
Lord Livermore (Lab)
My Lords, I am grateful to all noble Lords for their contributions to this debate.
I turn first to Amendment 28, tabled by the noble Baroness, Lady Kramer, which seeks the publication of illustrative projections of lifetime pension saving values before and after this change. The Government do not agree that this amendment is necessary to provide the required information on personal pension saving outcomes. The impacts of the measures in the Bill, including on employees and employers, are already set out in the tax information and impact note published alongside the Bill’s introduction.
Additionally, the Government published a policy costing note, which includes detail on the tax base and static costing as well as a summary of the behavioural responses expected by individuals and employers. The Office for Budget Responsibility has set out impacts in its economic and fiscal outlook, making it clear that it does not expect a material impact on savings behaviour as a result of the tax changes made in the Budget. Similarly, there are already a number of existing tools and services that individuals can use to understand their personal financial position and estimate their potential retirement income.
Amendments 29 and 30, tabled by the noble Baronesses, Lady Altmann and Lady Neville-Rolfe, and the noble Lords, Lord Altrincham and Lord de Clifford, would require the Government to take advice examining the impact of this change on employers, pension adequacy and workers’ pay. They also seek to make commencement of the Act conditional on the publication of an independent review of its effects, including on pension adequacy. The impacts of this measure have already been set out across the range of usual publications for changes to national insurance; these include the published tax information and impact note and policy costings note, as well as the Office for Budget Responsibility’s economic and fiscal outlook.
These amendments raise a wider point about the role of salary sacrifice in the pension salary saving system, particularly in relation to incentivising saving and improving pension adequacy. It is important to place this measure in context. Salary sacrifice existed in the 2000s and early 2010s, yet, during this period, there were falls in private sector pension saving. The key factor that has led to an increase in saving in recent years, as many noble Lords have noted in this debate, is automatic enrolment. As a result of automatic enrolment, more than 22 million workers across the UK are now saving each month.
Although all of us here share a commitment to improving pension adequacy, many groups at higher risk of under-saving—including the self-employed, low earners and women—are not the most likely to benefit from salary sacrifice. Only one in five self-employed people save into a pension, but they are entirely excluded from salary sacrifice. Low earners are most likely not to be saving, but higher earners are more likely to be using salary sacrifice. Many women are under-saving for retirement, but many more men use pension salary sacrifice.
The pensions tax relief system remains hugely generous, and there remain significant incentives to save into a pension. The £70 billion of income tax and national insurance contribution relief that the Government currently provide on pensions each year will be entirely unaffected by these changes.
Given the points I have made, I respectfully ask noble Lords to withdraw or not press their amendments.
Baroness Neville-Rolfe
“(2) The provisions of this Act, other than this section, may not come into force unless and until the conditions in subsections (2A) to (2C) are met.(2A) The Secretary of State must undertake an independent review of the impact of this Act on employers.(2B) The report must in particular consider—(a) the direct and indirect costs incurred by employers as a result of this Act,(b) the effect of the Act on employer pension contributions and the use of salary sacrifice arrangements,(c) the additional compliance costs necessitated by this Act, and(d) any consequential impacts on employment practices, workforce retention or remuneration structures.(2C) The Secretary of State must publish the report of the review and lay it before both Houses of Parliament.”Member’s explanatory statement
This amendment makes commencement of the Act conditional on the publication of an independent report on its impact on employers.
Lord Wilson of Sedgefield (Lab)
There is agreement on my side that we will go on for a little while after that.
Baroness Neville-Rolfe (Con)
Sorry—I was advised that there is no agreement beyond 7.45 pm.
Lord Wilson of Sedgefield (Lab)
It has been agreed with the clerks and everyone that we will go beyond that to 8 pm so that we can try to get it all finished.
Baroness Neville-Rolfe (Con)
Well, I have been told that there is no agreement beyond 7.45 pm. I do not have a Whip in here.
Lord Wilson of Sedgefield (Lab)
We will stick with 8 pm. If we start now, we will be able to finish it by then; if not, we will not.
The Deputy Chairman of Committees (Viscount Stansgate) (Lab)
Allow me to offer my help to the Committee. As I understand it, it is possible for this Sitting to continue until 8 pm.
Baroness Neville-Rolfe (Con)
My Lords, my amendment in this group seeks to make the commencement of this Act conditional upon the publication of an independent review of its impact on employers.
The Government’s decision to cap national insurance relief on salary sacrifice pension contributions at £2,000 per year has been presented as a measure targeted at higher earners, but the reality, as those of us who have spoken to businesses up and down the country know, is rather more complicated than that. This is not simply a matter of adjusting the tax affairs of a few well-paid executives. This measure hits employers directly and in ways that Ministers have not thus far adequately costed or explained. For small and medium-sized enterprises in particular, the costs are not trivial. Many have structured their entire remuneration and pensions offerings around salary sacrifice arrangements. They have done so because it is administratively straightforward, it benefits their staff, and it has had the backing of the previous Government as a sensible way to encourage workplace pension saving. Those businesses now face not only higher employer national insurance costs but also the compliance burden of unpicking arrangements that may have been in place for years.
Let us be plain about what this means for a small business. We are talking about firms with perhaps 20 or 30 staff, businesses that do not have large HR departments or in-house tax teams. They will need to review every employment contract, revisit their payroll systems and, in many cases, seek professional advice to understand their new obligations. What is particularly troubling is that we have not seen from the Government anything approaching a comprehensive assessment of these impacts. We know that HMRC consulted last year, but it got a dusty answer. The OBR has produced some high-level revenue estimates, which do not reassure us, and we know from the Treasury note that it expects this measure to raise several billion pounds by the end of the Parliament. But what we have not seen, and what employers and employees alike are entitled to expect, is a proper independent analysis of what this means in practice, especially for SMEs and middle-income employees.
There has been no serious attempt to model the indirect costs, the effect on employer pension contributions, the likelihood that firms will scale back their own contributions to compensate for higher tax costs, or the impact on workforce retention where salary sacrifice has been used as a recruitment and benefits tool. The OBR itself has acknowledged significant uncertainty in its projections, noting that revenue yields are highly sensitive to behavioural change—a very important point—and yet the Government press ahead without the evidence base one would expect for a measure of this scale.
My concern—which is shared by a range of voices in the pensions industry and in business groups and among those who have looked carefully at the measure— is that, in restricting salary sacrifice without proper analysis, the Government risk undermining the very pension-saving behaviours they claim in other contexts to support. As the ABI has put it, savers and the pension system need stability. What we should not be doing is swapping pension stability for short-term revenue raisers.
The Minister has cited a number of statistics on the numbers whom HMT anticipates will be affected, but these fail to recognise that the Government have almost no idea of how employers and, therefore, employees would respond and be affected by those changes. As I have already mentioned, the OBR has said that there is a high level of uncertainty over the size of the behavioural response. If an employer stops offering a salary sacrifice because of the compliance costs and complexity, as many of them have warned they will, then every one of their employees will be affected. So how can the Minister say that 74% of basic rate taxpayers will be left unaffected when HMT has no idea how the organisations employing them will react to the Bill? Indeed, the detail is still unclear. The point many noble Lords have raised stands: the Bill brings a great deal of uncertainty, and the Treasury does not understand the wider effects of what it is proposing—thus my wish to delay commencement until we have a clearer view.
I welcome Amendment 32 in the name of the noble Baroness, Lady Kramer, which references the OBR’s supplementary forecasts. I do not want to steal her thunder, but the issues this forecast raises are numerous. Of particular concern are the behavioural changes that it anticipates. The OBR estimates that behaviour reduces the 2030-31 yield by around 48% compared with the static figure. Employers are assumed to redirect pay growth into employer contributions, employees are assumed to shift into relief at source or net pay arrangements, and there are additional pass-through effects into wages and profits. In other words, nearly half the static yield depends on assumptions about how employers and employees respond. The options open to employees and employers are numerous, and they have three years to think about it.
Another serious concern highlighted is that HMRC does not hold comprehensive data on salary sacrifice usage. As we understand it, the modelling used by the OBR relies heavily on ASHE survey data and historic APSS 107 returns to estimate bonus sacrifice behaviour. The OBR therefore assigns this measure a medium-high uncertainty rating with particular uncertainty around behavioural responses and the size of the bonus sacrifice base. This policy is uncertain. How will it affect savings, how will it affect behaviour and, significantly, how much will it raise and for how long?
I know others may have questions for the Minister, but the new arrangements come into operation in 2029-30 and, as we have all been saying, there is time for more questions to be asked and answered and for more work to be done. I hope the Minister will look at these various amendments positively. I thank the Deputy Chairman for his clarification on timing, and I beg to move.
Baroness Kramer (LD)
My Lords, the noble Baroness, Lady Neville-Rolfe, has relieved me of the burden of trying to explain the primary clause within my amendment, which would require a formal review and report on the OBR supplementary forecast information release. As she said, this came out on 5 February, I understand in response to an FoI request, which, frankly, is no way to provide information to Parliament. As she said, it concludes that behavioural response to the measure—and that is key to the impact that this Bill will have—is highly uncertain. The further detail that she provided is so similar to what I would have provided that I am not going to repeat it. I thank the noble Lord, Lord de Clifford, for also signing this.
The other part of the review would cover the operational remuneration arrangements and the impact on pension adequacy and salaries. I know the Minister thought he covered this issue, but I think he could tell that in the Room uncertainty continues. Further clarification is needed around this issue because employers are going to be looking for that. This is an opportunity to provide it.
I have to say that I do not think I have ever seen an OBR report that is so filled with the word “uncertainty”. Obviously, it stands behind what it has written, but it does not feel like a report that has been written with a great deal of confidence. That confidence needs to be in place for Parliament to act on legislation.
Lord de Clifford (CB)
I have the pleasure of supporting the amendment from the noble Baroness, Lady Kramer. At Second Reading, I raised behavioural change and the OBR’s forecast about the drop in income is essential. Employers will look to find the most tax efficient way to make pension payments, and therefore we need the OBR to make sure that it accounts for these payments. As an employer, although it will increase administration, if there is a saving to be made, we will look for opportunities to pay pension payments in alternative ways. We covered that earlier, and the Minister gave a little reassurance that employer pension contributions may be acceptable and will not be counted as a salary sacrifice. As an employer, that would be welcome.
Lord Londesborough (CB)
I will very briefly add one question about the OBR forecast. I think that the noble Baroness, Lady Kramer, said at Second Reading that she found the timing “weird”. I certainly find it extraordinary that we have a five-year forecast of which the first three years are irrelevant—they are zero—and then we have a 48% fall in the second year. This begs the question: where are the forecasts for years three, four and five? If we are following this trend, we have a fireworks display. As the noble Lord, Lord Altrinchan, said, the Government should not be indulging in short-term fiscal levers. Where are the forecasts for those years? These measures do not actually come into effect until the financial year 2030.
Lord Livermore (Lab)
My Lords, I will first address Amendment 31, tabled by the noble Baronesses, Lady Neville-Rolfe and Lady Altmann, and the noble Lord, Lord Altrincham. I agree on the importance of transparency on the impact of this policy, including on employers. However, an additional publication is not necessary to achieve that objective. A number of documents have already been published in line with the usual practice for national insurance contribution changes, which comprehensively set out the impacts of this measure, including on employers.
The tax information and impact note was published alongside the introduction of the Bill. This sets out the number of employers expected to be impacted by this measure, the one-off costs—including familiarisation with the change, the training of staff and updating of software—and the expected continuing costs, including performing more calculations, and recording and providing additional information to HMRC, where salary sacrifice schemes continue to be used. This equates to a one-off £75 and an ongoing £99 per business per year. The Government also published a policy costing note, which includes detail on the costing of the measures, including the tax base, static costing and a summary of the behavioural responses expected by individuals and employers.
The Office for Budget Responsibility published its economic and fiscal outlook, which provides the OBR’s independent scrutiny of the Government’s policy costing. The OBR also published a supplementary forecast note, which provided additional information that it received in last year’s Budget to further increase the transparency of this measure. Taken together, these publications already provide an appropriate and comprehensive assessment of employer impacts.
On Amendment 32, the OBR’s economic and fiscal outlook and its supplementary forecast—
Lord Ashcombe (Con)
I thank the Minister for giving way. He has mentioned up to five different publications where this information may be found. Is it not possible for the Government to bring it into one place, so that we can actually see what the information is?
Lord Livermore (Lab)
My Lords, as I have already said, it has been published in various places, and I do not see the need to bring that into one place, as the noble Lord asked.
On Amendment 32, the OBR’s economic and fiscal outlook and its supplementary forecast publications set out how behavioural responses have been considered in certifying the costing. Some of these behavioural assumptions were also published in the policy costing note accompanying the Budget. The supplementary forecast information was drawn from analysis and data supplied to the OBR by the Government ahead of Budget 2025, in line with the standard process by which the OBR scrutinises and certifies costings. The Government’s published costings therefore already reflect these behavioural effects, and the OBR has certified these costings in the usual way. Given that the material reference is already publicly available and has been fully reflected in the certified policy costings, it is not necessary to review the OBR’s supplementary forecast.
If the noble Lord, Lord Londesborough, will forgive me, I will write to him with the answer to his specific question. In the meantime, given the points I have made, I respectfully ask noble Lords not to press their amendments.
Baroness Neville-Rolfe (Con)
My Lords, I am grateful to all noble Lords who have spoken in this debate—a shorter debate than we probably needed—and I am particularly grateful to the noble Baroness, Lady Kramer, and the noble Lord, Lord de Clifford, for drawing out so clearly the scale of the uncertainty that we are facing here.
The Minister has referred to various costings and has described them as conventional, but the truth is that the tax impact notes that have been published are inadequate, as indeed were parallel information notes published last year when we were discussing the national insurance changes of £25 billion. As a result, the consequences we are now seeing in the economy were not, to my mind, adequately flagged up.
However, where a policy is acknowledged by the OBR to carry medium to high uncertainty, and where almost half of the projected yield depends on a behavioural response that is not known in advance, I think the data that we have is incomplete. It is therefore reasonable to pause and require an independent assessment, and we have time for that. The alternative is that the Government legislate blind and then ignore the impact of the measures they take, as they did last year. In this case, of course, it will be a long time before we know the impact, because the measures will come into play in 2029-30.
In matters of pension saving and employment costs, stability and predictability are essential. If the Government are confident in their policy, they should have nothing to fear from the independent scrutiny that we have proposed. But time is late; we have reached the witching hour, and I beg leave to withdraw the amendment.
The Deputy Chairman of Committees (Viscount Stansgate) (Lab)
I thank members of the Committee for the expeditious way they have dealt with this Bill in one sitting. I also extend our thanks to our colleagues from Hansard, who have been able to stay until we concluded. The Committee’s proceedings on the Bill have been completed.